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FILE NO. 0-21327
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10/A
GENERAL FORM FOR REGISTRATION OF SECURITIES
PURSUANT TO SECTION 12(B) OR 12(G) OF THE
SECURITIES EXCHANGE ACT OF 1934
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AMENDMENT NO. 5
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BLOWOUT ENTERTAINMENT, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 87-0498950
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
7227 NE 55TH AVENUE 97218
PORTLAND, OREGON (Zip Code)
(Address of principal executive
offices)
(503) 331-2729
(Registrant's telephone number, including area code)
SECURITIES TO BE REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
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TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH
TO BE SO REGISTERED EACH CLASS IS TO BE REGISTERED
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None None
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SECURITIES TO BE REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, PAR VALUE $.01 PER SHARE
(TITLE OF CLASS)
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CROSS REFERENCE SHEET
Except for Items 10, 14 and 15(b) below, the information required by each
Item listed below is contained under the sections of the attached Information
Statement indicated below and such section or sections are incorporated into
such Items by reference. The information required by Items 10 and 15(b) is
contained in the Section of this Form 10 entitled "Additional Information".
Item 14 is not applicable.
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ITEM NO. LOCATION IN INFORMATION
IN FORM 10 STATEMENT/REGISTRATION STATEMENT
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Item 1. Business................ Summary of Certain Information; The Company;
Business
Item 2. Financial Information... Selected Historical and Pro Forma Financial Data;
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Item 3. Properties.............. Business
Item 4. Security Ownership of
Certain Beneficial
Owners and Management... Principal Stockholders
Item 5. Directors and Executive Management
Officers................
Item 6. Executive Compensation.. Management
Item 7. Certain Relationships
and Related
Transactions............ Related Party Transactions
Item 8. Legal Proceedings....... Business
Item 9. Market Price of and
Dividends on the
Registrant's Common
Equity and Related
Stockholder Matters..... Description of Company Capital Stock;
Management; The Distribution; Risk Factors
Item 10. Recent Sales of Additional Information
Unregistered Securities.
Item 11. Description of
Registrant's Securities
to be Registered........ Description of Company Capital Stock
Item 12. Indemnification of Management; Description of Company Capital Stock
Directors and Officers..
Item 13. Financial Statements and
Supplementary Date...... Index to Financial Statements
Item 14. Changes in and
Disagreements with
Accountants on
Accounting and Financial
Disclosure.............. Not Applicable
Item 15(a) Financial Statements.... Index to Financial Statements
Item 15(b) Exhibits................ Additional Information
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ADDITIONAL INFORMATION
RECENT SALES OF UNREGISTERED SECURITIES
The following is a summary of transactions by the Company during the last
three years involving sales of the Company's securities that were not
registered under the Securities Act:
(i) In May 1996, the Company issued 913,468 shares of BlowOut Common Stock
to Entertainment One, Inc., a Delaware corporation for all of the assets and
assumption of all of the liabilities of E-1. Exemption from the registration
provisions of the Securities Act for such transaction was claimed under
Section 3(b) of the Securities Act and Rule 505 promulgated thereunder on the
basis that the value of the consideration received for such shares did not
exceed $5.0 million and that such purchaser acquired such securities without a
view toward the distribution thereof.
(ii) In March and April 1996, the Company issued $2.0 million aggregate
principal amount of subordinated convertible promissory notes to Mr. Bill
Levine and Culture Convenience Club, Ltd, a Japanese corporation which is an
affiliate of Mr. Muneaki Masuda. Each of Mr. Levine and Mr. Masuda is and at
the time of the transactions was a director of the Company and of the
Company's principal shareholder, Rentrak Corporation. In August 1996, such
notes were converted into an aggregate of 243,578 shares of BlowOut Common
Stock (or $8.21 per share) for no additional consideration. Exemption from the
registration provisions of the Securities Act for such transactions was
claimed under Section 4(2) of the Securities Act on the basis that such
transactions did not involve any public offering, the purchasers were
sophisticated with access to the kind of information registration would
provide and that such purchasers acquired such securities without a view
toward the distribution thereof.
(iii) In September 1996, the Company issued 362,931 shares of BlowOut Common
Stock to CCC for $2.98 million in cash. Exemption from the registration of the
Securities Act for such transaction was claimed under Section 4(2) of the
Securities Act on the basis that such transactions did not involve any public
offering, the purchaser was sophisticated with access to the kind of
information registration would provide and that such purchasers acquired such
securities without a view toward the distribution thereof.
S-1
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November 12, 1996
Dear Shareholder:
The Board of Directors of Rentrak Corporation ("Rentrak") has approved the
distribution (the "Distribution") to holders of Rentrak Common Stock, through a
special dividend, of the Common Stock of BlowOut Entertainment, Inc.
("BlowOut"). The enclosed Information Statement contains information about the
Distribution and about BlowOut.
If you are a holder of Rentrak Common Stock of record at the close of
business on November 18, 1996, you will receive as a dividend one share of
BlowOut Common Stock for every 8.34 shares of Rentrak Common Stock you hold. We
expect to mail the BlowOut Common Stock certificates starting on or about
November 25, 1996. Fractional shares will be paid in cash. This Distribution
will be a taxable transaction to the shareholders of Rentrak.
The completion of the Distribution will permit BlowOut and Rentrak each to
concentrate on its core business with separate experienced and focused
management teams. Rentrak believes that the Distribution will also allow
financial markets to better understand and recognize the merits of the two
businesses.
After the Distribution, Rentrak will continue its primary business as a
wholesale distributor of video cassettes to home video specialty stores under
its Pay Per Transaction system.
After the Distribution, BlowOut will continue to be engaged in the business
of operating "store within a store" retail video outlets which rent and sell
video cassettes, video games, computer games and programs on CD-ROMs in Wal-
Mart and Wal-Mart Super Centers, Super Kmart Centers, Ralphs grocery stores and
Food 4 Less grocery stores. BlowOut will continue to participate in the Pay Per
Transaction System.
In connection with the Distribution, the shareholders of Rentrak on the
record date will retain their Rentrak share certificates. Since Rentrak will
continue forward, your share certificates of Rentrak must be retained. You will
automatically receive new BlowOut share certificates. NO FURTHER ACTION ON YOUR
PART IS REQUIRED.
We are excited about this separation and the growth opportunities it will
create for each company and its shareholders.
Sincerely,
LOGO
Ron Berger
Chairman, President and
Chief Executive Officer
Rentrak Corporation
LOGO
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INFORMATION STATEMENT
BLOWOUT ENTERTAINMENT, INC.
COMMON STOCK
This Information Statement is being furnished in connection with the
distribution (the "Distribution") to holders of common stock, par value $.001
per share ("Rentrak Common Stock"), of Rentrak Corporation ("Rentrak") of
1,457,343 shares of common stock, par value $.01 per share (the "BlowOut
Common Stock"), of BlowOut Entertainment, Inc. ("BlowOut" or the "Company")
owned by Rentrak pursuant to the terms of a Distribution Agreement between the
Company and Rentrak, dated as of November 11, 1996. The BlowOut Common Stock
being distributed will represent approximately 50% of the total issued and
outstanding shares of BlowOut Common Stock. Immediately after the
Distribution, Rentrak will continue to own 241,599 shares of BlowOut Common
Stock (approximately 9.9% of the total issued and outstanding shares of such
stock). See "The Distribution" and "Principal Stockholders."
Shares of BlowOut Common Stock will be distributed to holders of record of
Rentrak Common Stock as of the close of business on November 18, 1996 (the
"Record Date"). Each such holder will receive one share of BlowOut Common
Stock for every 8.34 shares of Rentrak Common Stock held on the Record Date.
The Distribution is scheduled to occur on November 25, 1996 (the "Distribution
Date") or as soon thereafter as practicable. No consideration will be paid by
holders of Rentrak Common Stock for shares of BlowOut Common Stock.
The Distribution will be a taxable transaction to the shareholders of Rentrak.
There is no current trading market for BlowOut Common Stock, although a
"when issued" market is expected to develop prior to the Distribution Date.
The Company has made application to list the shares of BlowOut Common Stock on
the NASDAQ Small Cap Market ("NASDAQ/SCM"). Listing on the NASDAQ/SCM is
subject to the shares of BlowOut Common Stock maintaining a bid price of $3.00
per share or more throughout the first day of "when issued" trading. See "The
Distribution--Listing and Trading of the BlowOut Common Stock."
SEE "RISK FACTORS" BEGINNING ON PAGE 6 HEREIN FOR A DISCUSSION OF CERTAIN
FACTORS THAT SHOULD BE CONSIDERED BY SHAREHOLDERS OF RENTRAK IN
CONNECTION WITH THE DISTRIBUTION.
NO SHAREHOLDER APPROVAL OF THE DISTRIBUTION IS REQUIRED OR SOUGHT.
WE ARE NOT ASKING YOU FOR A PROXY AND YOU ARE REQUESTED NOT TO SEND US A
PROXY.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR BY ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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THIS INFORMATION STATEMENT DOES NOT CONSTITUTE AN OFFER TO
SELL OR THE SOLICITATION OF AN OFFER TO BUY ANY SECURITIES.
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Shareholders of Rentrak with inquiries related to the Distribution should
contact F. Kim Cox, Corporate Secretary, Rentrak Corporation, 7227 NE 55th
Avenue, Portland, Oregon 97218-0888, telephone (503) 284-7581, or the
Company's stock transfer agent, U.S. Stock Transfer Corporation, 1745 Gardena
Avenue, Glendale, California 91204, telephone (818) 502-1404. U.S. Stock
Transfer Corporation is also acting as Distribution Agent for the
Distribution.
THE DATE OF THIS INFORMATION STATEMENT IS NOVEMBER 12, 1996.
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INFORMATION STATEMENT
TABLE OF CONTENTS
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PAGE
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SUMMARY OF CERTAIN INFORMATION........................................... 1
RISK FACTORS............................................................. 6
THE DISTRIBUTION......................................................... 13
RELATED PARTY TRANSACTIONS............................................... 22
FINANCING................................................................ 25
CAPITALIZATION........................................................... 27
SELECTED HISTORICAL AND PRO FORMA FINANCIAL DATA......................... 28
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS........................................................... 30
THE COMPANY.............................................................. 37
BUSINESS................................................................. 38
MANAGEMENT............................................................... 44
PRINCIPAL STOCKHOLDERS................................................... 50
DESCRIPTION OF COMPANY CAPITAL STOCK..................................... 51
AVAILABLE INFORMATION.................................................... 54
INDEX TO FINANCIAL STATEMENTS............................................ F-1
ANNEX IOPINIONS OF HOULIHAN LOKEY HOWARD & ZUKIN
ANNEX II AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF BLOWOUT
ENTERTAINMENT, INC.
ANNEX IIIAMENDED AND RESTATED BYLAWS OF BLOWOUT ENTERTAINMENT, INC.
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SUMMARY OF CERTAIN INFORMATION
The following summary is qualified in its entirety by the more detailed
information and financial statements and notes thereto appearing elsewhere in
this Information Statement, which should be read in its entirety. For purposes
of this Information Statement, unless the context otherwise requires, the term
"Company" or "BlowOut" includes BlowOut Entertainment, Inc., its subsidiaries
(including W-One, Incorporated; K-One, Incorporated; and Entertainment One,
Inc.) and their predecessors and subsidiaries and the term "Rentrak" includes
Rentrak Corporation and its subsidiaries except for BlowOut. Except for share
information contained in the historical financial statements listed in the
Index to Financial Statements herein and under the caption "Selected Historical
and Pro Forma Financial Data," as otherwise set forth herein or as the context
otherwise requires, all share information regarding BlowOut Common Stock
reflects a 1.01491-for-1 stock split, effected as a stock dividend on October
9, 1996. See "Description of Company Capital Stock-Stock Dividend."
THE DISTRIBUTION
Distributing Company.......... Rentrak Corporation, an Oregon corporation.
Distributed Company........... BlowOut Entertainment, Inc., a Delaware
corporation, approximately 70% of the issued
and outstanding common stock of which is owned,
directly or indirectly, by Rentrak, and
approximately 30% of which is owned by other
parties (the "BlowOut Minority") immediately
prior to the Distribution.
Distribution Ratio............
One share of BlowOut Common Stock for every
8.34 shares of Rentrak Common Stock held on the
Record Date.
Securities to be Distributed..
Based on approximately 12,154,239 shares of
Rentrak Common Stock outstanding on October 31,
1996, approximately 1,457,343 shares of BlowOut
Common Stock. The BlowOut Common Stock to be
distributed will constitute approximately 60%
of the issued and outstanding shares of BlowOut
Common Stock immediately after the
Distribution.
Share Ownership of BlowOut
After the Distribution........
Immediately after the Distribution, Rentrak
will continue to own approximately 9.9% of the
issued and outstanding shares of BlowOut Common
Stock. The BlowOut Minority consists of
Mr. Bill LeVine, a director of each of BlowOut
and Rentrak, Culture Convenience Club Ltd.
("CCC"), a corporation controlled by Mr.
Muneaki Masuda, a director of each of BlowOut
and Rentrak, and approximately 30 other
stockholders who are unaffiliated with Rentrak
or BlowOut. Immediately after the Distribution,
Mr. LeVine, CCC and such other stockholders
will own approximately 7.1%, 24.8% and 5.3% of
the outstanding BlowOut Common Stock. See
"Principal Stockholders."
Fractional Share Interests.... Fractional shares of the BlowOut Common Stock
will not be distributed. Fractional shares of
BlowOut Common Stock will be aggregated and
sold in the public market by the Distribution
Agent and the aggregate net cash proceeds will
be distributed ratably to those stockholders
entitled to fractional interests,
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including such interests resulting from
ownership of fewer than 10 shares of Rentrak
Common Stock. There are approximately 440
shareholders of record of Rentrak Common Stock.
The Company anticipates that there will be
approximately 470 stockholders of record of
BlowOut Common Stock immediately after the
Distribution. See "The Distribution--Manner of
Effecting the Distribution."
Record Date................... November 18, 1996 (5:00 p.m. Eastern Standard
Time).
Distribution Date............. November 25, 1996.
Mailing Date.................. Certificates representing the shares of BlowOut
Common Stock to be distributed pursuant to the
Distribution will be delivered to the
Distribution Agent on the Distribution Date.
The Distribution Agent will send certificates
representing the shares of BlowOut Common Stock
to holders of Rentrak Common Stock on the
Distribution Date or as soon as practicable
thereafter. HOLDERS OF RENTRAK COMMON STOCK
NEED NOT TAKE ANY ACTION WITH RESPECT TO THE
DISTRIBUTION AND SHOULD NOT SEND STOCK
CERTIFICATES TO RENTRAK, THE COMPANY OR THE
DISTRIBUTION AGENT. See "The Distribution--
Manner of Effecting the Distribution."
Conditions to the The Distribution is conditioned upon, among
Distribution.................. other things, declaration of the special
dividend by the Board of Directors of Rentrak
(the "Rentrak Board"). The Rentrak Board has
reserved the right to waive any condition to
the Distribution, subject to certain rights of
the Board of Directors of the Company (the
"Company Board") or, even if the conditions to
the Distribution are satisfied, to abandon,
defer or modify the Distribution at any time
prior to the Distribution Date. See "The
Distribution--Conditions; Termination."
Reasons for the Distribution.. To permit BlowOut and Rentrak each to
concentrate on its core business without regard
to objectives of the other company, to offer
more attractive incentives for key employees of
each company, to improve the ability of the
capital markets to follow each company and its
business, and to improve access to capital for
each company.
Tax Consequences.............. The Distribution will be a taxable distribution
for federal income tax purposes and may also be
a taxable transaction for state, local and
other tax purposes. It is currently expected
that holders of Rentrak Common Stock will
recognize dividend income with respect to the
Distribution estimated to be $0.55 per each
share of Rentrak Common Stock. This estimate is
based on a value of $5.50 per share of BlowOut
Common Stock and becomes the basis of the
shares of BlowOut Common Stock to the holder of
the shares of Rentrak Common Stock. Such
valuation is not
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necessarily indicative of the prices at which
the BlowOut Common Stock will trade. Neither
Rentrak nor BlowOut, nor any of their advisors
or any other person makes any representation as
to the present or future value of BlowOut
Common Stock. It is currently expected that the
Distribution should not result in recognition
of any income or loss for federal tax purposes
by Rentrak. See "The Distribution--Federal
Income Tax Aspects of the Distribution," and
Risk Factors--No Current Market for the BlowOut
Common Stock."
Trading Market................ There is currently no public market for the
BlowOut Common Stock. The Company has made
application to list BlowOut Common Stock on the
NASDAQ Small Cap Market ("NASDAQ /SCM").
A "when issued" market is expected to develop
prior to the Distribution Date. See "The
Distribution--Listing and Trading of the
BlowOut Common Stock" and "Risk Factors--No
Current Market for BlowOut Common Stock."
Trading Symbol................ BLWT
Distribution and Transfer
Agent for BlowOut Common
Stock.........................
U.S. Stock Transfer Corporation.
Dividends..................... The Company's dividend policy will be
established by the Company Board from time to
time based on the results of operations and
financial condition of the Company, such other
business considerations as the Company Board
deems relevant, and restrictions and
limitations imposed under financing documents
binding upon the Company. The Company currently
intends to retain earnings, if any, for use in
the operation and expansion of its business
and, therefore, does not anticipate paying any
cash dividends on the BlowOut Common Stock in
the foreseeable future. See "Risk Factors--No
Dividends."
Anti-Takeover Provisions...... The Amended and Restated Certificate of
Incorporation (the "Certificate of
Incorporation") and By-Laws of the Company, as
well as Delaware statutory law, contain
provisions that may have the effect of
discouraging an acquisition of control of the
Company not approved by the Company Board.
These provisions have been designed to enable
the Company to develop its business and foster
its long-term growth without disruptions caused
by the threat of a takeover not deemed by the
Company Board to be in the best interests of
the Company and its stockholders. Such
provisions may also have the effect of
discouraging third parties from making
proposals involving an acquisition or change of
control of the Company, although such
proposals, if made, might be considered
desirable by a majority of the Company's
stockholders. Such provisions could further
have the effect of making it more difficult for
third parties to cause the replacement of the
current management of the Company without the
concurrence of the Company Board.
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See "Risk Factors--Anti-Takeover Provisions"
and "Description of the Company Capital Stock."
Risk Factors.................. See "Risk Factors" beginning on page 6 for a
discussion of factors that should be considered
in connection with the BlowOut Common Stock
received in the Distribution.
Equity Financing.............. The Company recently converted two promissory
notes having outstanding principal amounts of
$1.0 million each, previously issued by the
Company to Bill LeVine, a director of the
Company and Rentrak, and to Culture Convenience
Club ("CCC"), an affiliate of Muneaki Masuda, a
director of the Company and Rentrak, into
121,789 shares of BlowOut Common Stock
(representing approximately 5% of the
outstanding shares of BlowOut Common Stock for
each such note). The Company also recently
issued 362,931 shares of BlowOut Common Stock
(representing approximately 14.9% of the
outstanding shares of BlowOut Common Stock) to
CCC for $2.98 million in cash. See "Financing"
and "Description of Company Capital Stock."
Debt Financing................ The Company has recently obtained two separate
credit facilities making available a total of
up to $7.0 million of secured debt financing,
consisting of a $2.0 million secured loan and a
$5.0 million revolving credit facility. See
"Financing" and "Capitalization."
Relationship with Rentrak
after the Distribution........
Rentrak will continue to hold 241,599 shares of
BlowOut Common Stock (approximately 9.9%).
Certain directors and an officer of Rentrak are
also currently, and after the Distribution will
continue to be, directors of BlowOut. One such
director of the Company, F. Kim Cox, intends to
resign upon the selection by the other members
of the Company Board of a replacement. See
"Management."
Rentrak is the principal creditor of the
Company and has agreed to guarantee certain
indebtedness of the Company. See "Related Party
Transactions."
BlowOut is and will continue to be a
participant in the Rentrak "Pay Per
Transaction" video distribution system (the
"PPT System"). BlowOut currently leases and
will continue to lease office and warehouse
space from Rentrak. Rentrak will own and
license to the Company the "BlowOut" name and
mark. See "Distribution--Relationship Between
the Company and Rentrak After the Distribution"
and "Related Party Transactions."
NO ACTION IS REQUIRED OF OR SOUGHT BY RENTRAK SHAREHOLDERS IN CONNECTION WITH
THE DISTRIBUTION.
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THE COMPANY
The Company is engaged in the business of operating "store within a store"
retail video outlets which rent and sell video cassettes, video games,
computer games and programs on CD-ROMs in Wal-Mart stores and Wal-Mart
SuperCenters operated by Wal-Mart Stores, Inc. ("Wal-Mart"), Super Kmart
Centers operated by Kmart Corporation ("Kmart"), Ralphs grocery stores and
Food 4 Less grocery stores (together referred to herein as "Ralphs") pursuant
to individual leases with each of these retailers. As of September 30, 1996,
the Company operated 145 stores in Wal-Mart and in Wal-Mart SuperCenters, 35
stores in Super Kmart Centers, and six in Ralphs under the name "BlowOut
Video" pursuant to a license with Rentrak, and six additional stores in
Ralphs, under the name "Videos & More." The principal executive offices of the
Company are located at 7227 NE 55th Avenue, Portland, Oregon 97218-0888,
telephone (503) 331-2729.
The Company was formed by Rentrak in 1992 as SMM, Inc., a Delaware
corporation and thereafter changed its name to SVI, Inc. ("SVI"). During the
past year the business and operations of two wholly-owned subsidiaries of
Rentrak, W-One, Incorporated, an Oregon corporation ("W-1"), and K-One,
Incorporated an Oregon corporation ("K-1"), and the assets (subject to assumed
liabilities) of Entertainment One, Inc., a Delaware corporation ("E-1"), of
which Rentrak owned approximately 93% of the issued and outstanding common
stock, were consolidated with the Company, and the Company changed its name to
BlowOut Entertainment, Inc. All such corporations were engaged in the "store-
within-a-store" retail video rental and sales business. See "Company--History
of the Company." The Company and its predecessors have experienced significant
operating losses in recent years. As of September 30, 1996 the Company's
balance sheet reflects an accumulated deficit of approximately $11.2 million.
Furthermore, to date neither the Company nor its consolidated subsidiaries has
operated at a profit, and there can be no assurance that the Company will be
able to meet the demands of a growth strategy and operate at a profit at any
time in the foreseeable future. The Company's ability to achieve profitability
depends upon its ability to open additional stores successfully and to
increase revenues at new and existing stores. See "Selected Historical and Pro
Forma Financial Data" and the Financial Statements, including the Notes
thereto, and other financial data included elsewhere herein.
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RISK FACTORS
Shareholders of Rentrak should be aware that the Distribution and ownership
of the BlowOut Common Stock involves certain risk factors, including those
described below and elsewhere in this Information Statement, which could
adversely affect the value of their holdings. Neither the Company nor Rentrak
makes, nor is any other person authorized to make, any representation as to
the future market value of the BlowOut Common Stock. Any forward-looking
statements contained in this Information Statement should not be relied upon
as predictions of future events. Such statement are necessarily dependent on
assumptions, data or methods that may be incorrect or imprecise and that may
be incapable of being realized.
RECENTLY FORMED ENTITY WITH LIMITED COMBINED OPERATING HISTORY; SEPARATION
FROM RENTRAK
The Company was formed in 1992, but only recently expanded its operations
through the consolidations of SVI with W-1, K-1 and E-1. The Company's
management has limited experience operating the Company as a combined entity.
There can be no assurance that problems, expenses, complications and delays
will not arise from this consolidation or as the Company's management attempts
to grow the Company.
In addition, since the consolidation, the Company has operated as a
majority-owned subsidiary of Rentrak. The Company has relied upon Rentrak for
substantial financial support. During fiscal 1995 and the first nine months of
fiscal 1996, Rentrak contributed $9.3 million and $1.1 million, respectively,
in cash to the Company. In addition, Rentrak has deferred its collection of
amounts due by the Company under various agreements between Rentrak and the
Company. See "Related Party Transactions." As of September 30, 1996, the
Company was indebted to Rentrak in the amount of approximately $5.1 million.
In addition, Rentrak has agreed to guarantee up to $7.0 million of borrowings
under the Company's credit facilities provided by Phoenix Leasing Incorporated
("Phoenix") and Coast Business Credit ("CBC"). After the Distribution, Rentrak
will have a continuing monetary guaranty for the Phoenix credit facility.
After the Distribution, Rentrak has agreed, under certain circumstances in the
event of a default under the credit facility with CBC, to repurchase BlowOut's
video cassette inventory in an amount not to exceed the lesser of the amount
owed under the CBC facility or $5.0 million. Rentrak has no current intention
to provide any additional financial support to the Company following the
Distribution. The Company expects to meet its short-term liquidity
requirements through cash provided by operations, cash on hand and advances
under the Phoenix Facility and the CBC Line of Credit. Management believes
that these sources of cash, as well as the additional availability under the
above credit agreements, will be sufficient to meet its operating needs for at
least the next twelve months. The Company, to a lesser extent, has also relied
on Rentrak for assistance with personnel management, capital formation, and
administration. Upon completion of the Distribution, the Company will no
longer be able to rely on Rentrak for such administrative assistance and will
need to manage itself as a separate business entity, including obtaining
independent sources of financing and successfully replacing administrative
capability previously provided by Rentrak. See "The Distribution--Relationship
Between the Company and Rentrak After the Distribution" and "Financing."
HISTORY OF OPERATING LOSSES; HIGH LEVEL OF INDEBTEDNESS
The Company and its predecessors have experienced significant operating
losses in recent years. As of September 30, 1996, the Company's balance sheet
reflects an accumulated deficit of approximately $11.2 million. Furthermore,
to date neither the Company nor its consolidated subsidiaries has operated at
a profit, and there can be no assurance that the Company will be able to meet
the demands of a growth strategy and operate at a profit at any time in the
foreseeable future. In this regard, the Company anticipates that the capital
expenditures associated with the opening of new stores will cause it to
realize negative cash flow through at least 1997. The Company's ability to
achieve profitability depends upon its ability to open additional stores
successfully and to increase revenues at new and existing stores. See
"Selected Historical and Pro Forma Financial Data" and the Financial
Statements, including the Notes thereto, and other financial data included
elsewhere herein.
Following the Distribution, BlowOut will be highly leveraged. At September
30, 1996, the Company had current assets of $6.7 million and current
liabilities of $9.4 million. The Company has also entered into two credit
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facilities with maximum aggregate allowable borrowings of $7.0 million of
which $3.5 million is currently outstanding. As of September 30, 1996, total
indebtedness as a percentage of total capitalization was 85.6%. The Company's
leveraged position poses certain risks, including the risk that such position
may adversely affect its ability to obtain additional financing in the future
and may make the Company more vulnerable to economic downturns, and may limit
its ability to withstand competitive pressure. Moreover, although Rentrak has
agreed to guaranty up to $12 million of indebtedness of BlowOut, should such
guaranty be realized upon by a creditor of BlowOut, Rentrak would be entitled
to be subrogated to such creditor's claim against BlowOut under applicable
state law.
CHANGES IN TRADING PRICES OF RENTRAK COMMON STOCK
It is expected that Rentrak Common Stock will continue to be listed and
traded on the NASDAQ National Market System after the Distribution. As a
result of the Distribution, the trading price range of Rentrak Common Stock
could change, perhaps significantly from the trading price range of Rentrak
Common Stock prior to the Distribution. The combined trading prices of the
BlowOut Common Stock and Rentrak Common Stock held by stockholders after the
Distribution may be less than, equal to or greater than the trading prices of
Rentrak Common Stock prior to the Distribution.
DEPENDENCE ON HOST STORES
The Company is highly dependent on its relationships with its host stores,
particularly its relationships with Wal-Mart and Kmart, in whose stores
currently 94% of the Company's outlets are located. There can be no assurance
that the host stores will open additional stores in locations which are
commercially viable for retail video operations, or that the number of future
stores opened by the host stores will meet the Company's expansion plans. Any
host store could change its development or operation plans at any time.
The Company's management believes that the strategy of both Wal-Mart and Kmart
is to have more than one vendor operating "store within a store" video rental
and sales outlets. For example, Wal-Mart has leased space in certain Wal-Mart
stores to Blockbuster Video. The Company has an exclusive arrangement to
operate video retail outlets in Ralphs. The Company believes that neither
Kmart nor Ralphs opened additional video rental and sales outlets in its host
stores between May 31, 1996 and September 30, 1996, and, as a result, the
Company has not opened additional stores during such period with such host
stores. Moreover, there can be no assurance that host stores will not operate
their own video rental and sale outlets.
The Company is party to master leases with Wal-Mart and Kmart, respectively,
for its stores. The Wal-Mart master lease expires on November 18, 1999 and the
Kmart master lease expires on September 20, 1999. Each of these master leases
provides for an initial five-year term for each new store, with an additional
five-year optional renewal term. Either party to the Wal-Mart lease can elect
to close stores which fail to generate a minimum level of revenues. Although
there currently are stores operated by the Company in both Wal-Mart and Kmart
locations that are not performing at such minimum levels, neither Wal-Mart nor
Kmart has exercised its right to close such stores. However, the Company has
elected to close 24 stores (consisting of 23 stores in Wal-Marts and 1 store
in Kmart) during the past three (3) months, and has given Kmart notice of its
intention to close 10 additional under-performing stores in April 1997. The
Company has no exclusive right to open stores in Wal-Mart and Kmart stores and
no control over the geographic area or market in which the new stores will be
located. The master leases also allow Wal-Mart or Kmart, under certain
conditions, to restrict the ability of the Company to sell video cassette
titles which are being sold in particular Wal-Mart or Kmart stores,
respectively. There can be no assurance that the Company will be able to
operate stores within either Wal-Mart or Kmart stores for any period of time
following the terms provided in the master leases. Furthermore, although the
Company plans to seek to open video retail outlets in other mass retail and
grocery stores, if either Wal-Mart or Kmart terminates its relationship with
the Company, there can be no assurance that the Company could find a suitable
local, regional or national retail mass merchant with sufficient stores to
support its "store within a store" retail concept.
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CONTROL BY CERTAIN STOCKHOLDERS
Based on information available to the Company, including filings made with
the Securities and Exchange Commission, immediately following the
Distribution, Rentrak and two Rentrak directors who also are directors of the
Company will own beneficially in the aggregate approximately 41.8% of the
issued and outstanding shares of BlowOut Common Stock. Of such shares,
Rentrak, Mr. Bill LeVine, and Mr. Muneaki Masuda will beneficially own
approximately 9.9%, 7.1%, and 24.8% respectively. Accordingly, if such persons
opt to act as a group, they may exercise control over matters presented to the
BlowOut stockholders. However, such persons have no agreement, arrangement or
understanding with respect to their respective interest in the Company and
have no current intention to enter into any such agreement, arrangement or
understanding. See "Related Party Transactions," "Financing" and "Principal
Stockholders."
POSSIBLE CONFLICTS OF INTEREST AND RELATED PARTY TRANSACTIONS
Certain persons who are directors of the Company are also directors or
officers of Rentrak. Accordingly, conflicts of interest could arise for such
persons. As part of its ongoing business and operations, the Company regularly
engages in transactions with Rentrak. For example, the Company participates in
Rentrak's PPT System, and the fees and payments made by the Company in
connection with the PPT System will be similar to those currently paid by
unaffiliated third parties participating in the PPT System. Due to the
relationship between Rentrak and the Company, the terms on which certain
services have been provided to the Company by Rentrak or its affiliates have
not been necessarily determined by arm's-length negotiations. Certain
contractual arrangements which are currently in place will remain in effect
after the Distribution. See "The Distribution--Relationship Between the
Company and Rentrak After the Distribution." All such transactions will be
subject to review by the Board of Directors of the Company, and the directors
of both BlowOut and Rentrak are subject to fiduciary duties to their
respective corporations and their shareholders. Rentrak is currently the
principal creditor of the Company.
The on-going relationships between the Company and Rentrak may present
certain conflict situations for Mr. Bill LeVine and Mr. Muneaki Masuda, each
of whom serves as a director of the Company and of Rentrak and for Mr. F. Kim
Cox, who serves as a director of the Company and as the Executive Vice
President and Chief Financial Officer of Rentrak. Mr. Cox, as well as other
executive officers and directors of Rentrak and the Company also own (or have
options or other rights to acquire) shares of common stock in Rentrak.
Following the Distribution, Mr. Cox intends to resign upon the selection by
the other members of the Company Board of a replacement. Rentrak and the
Company will adopt, prior to the Distribution, appropriate policies and
procedures to be followed by the Board of Directors of each company to limit
the involvement of Messrs. Cox, LeVine and Masuda in conflict situations,
including matters relating to contractual relationships or litigation between
the Company and Rentrak. Such procedures include requiring Messrs. Cox, LeVine
and Masuda to abstain from voting as directors of each company with respect to
matters that present a significant conflict of interest between the companies.
NO CURRENT MARKET FOR THE BLOWOUT COMMON STOCK
There is not currently a public market for the BlowOut Common Stock and
there can be no assurance that a public market will develop, or as to the
prices at which trading in the BlowOut Common Stock will occur, after the
Distribution. Until the BlowOut Common Stock is fully distributed and an
orderly market develops, the prices at which trading in such stock occurs may
fluctuate significantly. Rentrak has received a report of Pennsylvania
Merchant Group Ltd. with respect to the valuation of the shares of BlowOut
Common Stock to be distributed in the Distribution. Such valuation is not
necessarily indicative of the prices at which BlowOut Common Stock will trade.
Neither Rentrak nor BlowOut, nor any of their advisors or any other person
makes any representation as to the present or future value of BlowOut Common
Stock. The Company has made application to list the shares of the BlowOut
Common Stock on the NASDAQ/SCM following the Distribution. The Company expects
that it will receive approval for listing of the shares of BlowOut Common
Stock on the NASDAQ/SCM subject to the shares maintaining a bid price of $3.00
per share or more throughout the first day of "when issued" trading. If the
shares of BlowOut Common Stock are not listed on the NASDAQ/SCM or any other
U.S. securities market,
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information regarding trading activity in such shares will not be disseminated
through daily publications and, the trading volume, market liquidity and bid
and ask prices of shares of BlowOut Common Stock could be adversely affected.
See "The Distribution--Listing and Trading of BlowOut Common Stock."
EXPANSION STRATEGY
The Company intends to implement expansion and growth strategies for opening
additional "store within a store" outlets in Wal-Mart SuperCenters, and, to a
much lesser extent, in Super Kmart Centers and Ralphs. As part of the
Company's expansion strategy, it plans to seek to open video retail outlets in
other mass retail and grocery stores. The Company typically is offered store
locations by Wal-Mart and Kmart six months in advance of the target store
opening date. The Company currently expects to open eight new stores in Wal-
Mart SuperCenters during the fourth quarter of fiscal year 1996 and 17 new
stores in Wal- Mart SuperCenters during fiscal year 1997. The Company closed
three stores in Super Kmart Centers in October, 1996 and intends to open three
new stores in Super Kmart Centers during the fourth quarter of fiscal year
1996. The Company currently does not believe that it will be opening a
significant number of stores in Super Kmart Centers or Ralphs in 1997. The
actual number of store openings will depend upon a number of factors outside
the Company's control including the expansion plans of Wal-Mart, Kmart and
Ralphs, the number of store locations offered to the Company and the
opportunities to open stores in other mass retail and grocery stores. Thus,
the actual number of store openings could vary significantly from the plan.
Substantial capital outlays of approximately $100,000 will be required to
open each new store. Continued losses and accumulated deficit have caused the
Company to expand at more moderate rate than previously expected. However, the
Company believes that its existing operating cash flow and credit facilities
will provide the capital necessary to open the new stores that are planned. If
the Company determines to open additional stores during fiscal 1997, the
Company may have to obtain other debt or equity financing or expand more
slowly than desired. Furthermore, after 1997, additional sources of debt and
equity capital may be required to continue to meet the Company's expansion
strategy. There can be no assurance that the Company will be able to obtain
any such additional financing on reasonable terms. Failure to meet the
expansion schedule of the host stores could have a material adverse effect on
the Company. Additional management resources will be required to expand
Company operations. There can be no assurance that the Company will be able to
attract and retain a sufficient number of skilled store managers to implement
this growth strategy.
QUARTERLY FLUCTUATIONS
The Company's future operating results may be affected by the number and
timing of store openings, the quality of new release titles available for
rental and sale, weather and other special and unusual events all of which are
outside the control of the Company. Spending on entertainment items such as
video rentals and purchases is discretionary and may be particularly
susceptible to regional and national economic conditions. In addition, any
concentration of new store openings and related new store preopening costs
near the end of a fiscal quarter could have an adverse effect on the financial
results for that quarter. Operating results for the Company's retail video
operations may also be affected by seasonal fluctuations in the release of
home video titles and customer traffic patterns in the host stores.
GEOGRAPHIC DIVERSITY; EFFICIENCIES OF OPERATIONS
The Company operates "store within a store" outlets in 28 states. Most of
the stores are in rural communities. The geographic diversity of these outlets
present special challenges with respect to store management, inventory
controls and communications. The opening of additional stores in new states or
regions could lead to redundancies and inefficiencies in operations.
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COMPETITION
The video cassette rental and sales industry is highly competitive, with
numerous national, regional and local video store operators. Competitors such
as Blockbuster Video have substantially greater financial resources and
marketing capabilities than those of the Company. The Company believes that
Wal-Mart has already entered into an agreement with Blockbuster Video to
operate video "store within a store" outlets in certain SuperCenters. Because
a majority of the Wal-Mart and Kmart stores in which the Company operates are
located in rural areas, the video operations also face competition from other
supermarket rental operations, a growing segment of the business. In addition,
the Company competes with a number of other leisure and retail entertainment
providers, including television, movie theaters, bowling alleys and sporting
events.
ALTERNATIVE DELIVERY TECHNOLOGIES
In addition to the direct competition from video retailers described above,
the Company faces indirect competition from alternative delivery technologies
which are intended to provide video entertainment directly to the consumer.
These technologies include: (i) direct broadcast satellite transmission
systems, which broadcast movies in digital form direct from satellites to
small antennas in the home; (ii) cable systems, which may transmit digital
format movies to the home over cable systems employing fiber optic technology;
and (iii) pay cable television systems, which may employ digital data
compression techniques to increase the number of channels available and hence
the number of movies which can be transmitted. Another source of indirect
competition comes from program suppliers releasing titles intended for "sell-
through" rather than rental to consumers at prices of approximately $10 to $30
per video cassette. To date, such "sell-through" pricing has generally been
limited to certain newly released hit titles with wide general family appeal.
As the Company's business is dependent upon the existence of a home video
rental market, a substantial shift in the video business to alternative
technologies or "sell-through" policies could have a material adverse effect
on the Company's future operations. Such growth in sell-through video tapes
has been influenced, in part, by sales from discount merchants, including Wal-
Mart.
DEPENDENCE UPON KEY PERSONNEL
The Company's growth and success have been largely dependent upon the
services of its president, Steve Berns. The Company is dependent for its
future success upon the continued services of its senior management,
particularly Messrs. Steve Berns, Karl Wetzel, and Harold Heyer. See
"Management." The Company believes the unexpected loss of the services of one
or more of these key employees could have a material adverse effect upon the
Company. The Company has entered into employment agreements for initial terms
ending between August 30, 1998 and January 31, 1999 with its executive
officers. The Company intends to maintain $12 million dollars of life
insurance on the life of Steve Berns. See "Management--Employment Agreements."
The Company believes that its future growth will also depend in large part
upon its continued ability to attract, retain and motivate additional branch
managers. There can be no assurance that the Company will be able to attract
and retain sufficiently qualified managers to support its growth strategy.
FRAUDULENT TRANSFER CONSIDERATIONS; LEGAL DIVIDEND REQUIREMENTS
To satisfy a condition to the consummation of the Distribution, the Rentrak
Board has received the opinion of Houlihan Lokey Howard & Zukin, Inc.
("Houlihan Lokey") regarding the solvency of the Company and Rentrak after
giving effect to the Distribution and, in reliance thereon, the opinion of
Rentrak's counsel regarding the permissibility of the Distribution under
Section 60.181 of the Oregon Business Corporation Act. See "The Distribution--
Opinions of Financial Advisors--Solvency Opinion." Opinions, by their very
nature are based upon various facts, assumptions and analysis and, therefore,
are not binding upon any court or third party. Accordingly, there can be no
assurance that third party creditors of Rentrak will not attempt to contest
the distribution on the basis that it is a fraudulent transfer of Rentrak
assets or an illegal distribution of assets to Rentrak shareholders.
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If a court in a lawsuit by an unpaid creditor or representative of
creditors, such as a trustee in bankruptcy, were to find that at the time
Rentrak effected the Distribution, the Company or Rentrak, as the case may be,
(i) was insolvent; (ii) was rendered insolvent by reason of the Distribution;
(iii) was engaged in a business or transaction for which the Company's or
Rentrak's remaining assets, as the case may be, constituted unreasonably small
capital; or (iv) intended to incur, or believed it would incur, debts beyond
its ability to pay as such debts as they mature, such court may be asked to
void the Distribution (in whole or in part) as a fraudulent conveyance and
require that the shareholders return the dividend (in whole or in part) to
Rentrak, or require the Company to fund certain liabilities for the benefit of
creditors. The measure of insolvency for purposes of the foregoing will vary
depending upon the jurisdiction whose law is being applied. Generally,
however, the Company or Rentrak, as the case may be, would be considered
insolvent if the fair value of their respective assets were less than the
amount of their respective liabilities or if they incurred debt beyond their
ability to repay such debt when due in the usual course of business.
The Rentrak Board and management believe that, in accordance with the
Solvency Opinions, the Company and Rentrak each will be solvent at the time of
the distribution (in accordance with the foregoing definitions), will be able
to repay its debts when due in the usual course of business following the
Distribution and will have sufficient capital to carry on its businesses.
ANTI-TAKEOVER PROVISIONS
The Company's Board of Directors has the authority to issue up to 1,000,000
shares of Preferred Stock in one or more series and to determine the price,
rights, preferences and privileges of the shares of each such series without
any further vote or action by the stockholders. The rights of the holders of
BlowOut Common Stock will be subject to, and may be adversely affected by, the
rights of the holders of any shares of Preferred Stock that may be issued in
the future. The issuance of Preferred Stock could have the effect of making it
more difficult for a third party to acquire a majority of the outstanding
voting stock of the Company, thereby delaying, deferring or preventing a
change of control of the Company. In addition, certain provisions in the
Company's Certificate of Incorporation, and By-laws (the "By-laws") relating
to classification of the Board of Directors, restrictions on calling special
meetings of stockholders, and requirements of timely notice for nominations of
persons for election to the Board of Directors and for business to be acted on
at annual or special meetings of stockholders, and requirements of timely
notice for nominations of persons for election to the Board of Directors and
for business to be acted on at annual or special meetings of stockholders may
discourage or make more difficult any attempt by a person or group of persons
to obtain control of the Company.
In addition, the Company is subject to the anti-takeover provisions of
Section 203 of the Delaware General Corporation Law. In general, the statute
prohibits a publicly-held Delaware corporation from engaging in a "business
combination" with an "interested stockholder" for a period of three years
after the date of the transaction in which the person became an interested
stockholder, unless the business combination is approved in a prescribed
manner. For purposes of Section 203, a "business combination" includes a
merger, asset sale or other transaction resulting in a financial benefit to
the interested stockholder, and an "interested stockholder" is a person who,
together with affiliates and associates, owns (or within three years prior,
did own) 15% or more of a corporation's voting stock. See "Description of
Company Capital Stock --Preferred Stock" and "--Certain Provisions of the
Certificate of Incorporation, By-laws and Delaware Corporation Law."
NO DIVIDENDS
The Company's dividend policy will be established by the Company Board from
time to time based on the results of operations and financial condition of the
Company, such other business considerations as the Company Board deems
relevant and restrictions and limitations imposed under financing documents
binding upon the Company, including a restriction on dividends contained in
the CBC Line of Credit. See "Financing--CBC Facility." The Company currently
intends to retain earnings, if any, for use in the operation and expansion of
its business and, therefore, does not anticipate paying any cash dividends on
BlowOut Common Stock in the foreseeable future.
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SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Distribution, the Company will have 2,433,330 shares
of BlowOut Common Stock outstanding of which 975,987 shares, including shares
owned by Rentrak, CCC, and Mr. LeVine, will be "restricted securities." The
shares of BlowOut Common Stock that are "restricted securities" within the
meaning of the Securities Act cannot be sold other than pursuant to an
effective registration statement or an exemption from registration, including
Rule 144 promulgated under the Securities Act. Immediately following the
Distribution, 182,450 shares of BlowOut Common Stock held by a subsidiary of
Rentrak will be available for sale under Rule 144 of the Securities Act of
1933, as amended (the "Securities Act"), subject to the volume and other
restrictions of Rule 144. An additional 121,789, 121,789, 187,028 and 362,931
shares of BlowOut Common Stock will become available for sale under Rule 144,
subject in certain cases to volume restrictions, in each of March, April, May
and August of 1998, respectively. Rentrak, CCC and Mr. LeVine hold certain
demand and "piggyback" registration rights with respect to the 848,108 shares
of "restricted securities" held by them which would require the Company to
register such shares for resale under the Act in certain circumstances. In
addition, the Company has granted the former stockholders of E-1 who currently
hold BlowOut Common Stock (the "E-1 Minority") "piggyback" registration rights
with respect to the remaining 127,879 shares of "restricted securities," which
generally grant the E-1 Minority the right to request registration of their
shares of the Company's common stock in connection with the filing by the
Company of a Registration Statement with respect to an offering of any equity
securities by the Company for its own account or for the account of any of its
equity holders (other than any registration filed in connection with the
Distribution, a registration statement filed on Form S-4 or S-8 or any other
registration statement filed in connection with the offer or sale to the
management of the Company of securities pursuant to an employee stock plan or
other employee benefit plan arrangement). Rentrak, CCC and Levine have each
informed the Company that they have no present plan or intention to dispose of
their shares of the Company, however, as a result of market conditions or
other considerations, each of their intentions may change. The sale of a
substantial number of shares of the BlowOut Common Stock by Rentrak, CCC, Mr.
LeVine or the E-1 Minority could adversely affect the market price of the
BlowOut Common Stock. See "Financing--Registration Rights" and "Description of
Company Capital Stock--Shares Eligible for Future Sale."
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THE DISTRIBUTION
REASONS FOR THE DISTRIBUTION
The Rentrak Board has determined that it is in the best interests of Rentrak
and its stockholders to undertake the Distribution for various reasons. Among
these are: (i) focusing the management of each of Rentrak and the Company on
the core business of each company without regard to the corporate objectives
and policies of the other company, (ii) improving the likelihood that each of
Rentrak and the Company would have greater access to capital than would
otherwise be the case, (iii) offering incentives more attractive and
appropriate for the motivation and retention of key employees of each company,
and (iv) improving the ability of the capital markets to follow and analyze
the operating performance of Rentrak and the Company by separating the
different businesses of each company. Because Rentrak is involved in the
wholesaling of video cassettes while the Company is involved in operating
retail "store-within-a-store" video cassette rental and sales outlets,
separation of the two companies would allow their respective managements to
take actions without regard to the effect such action would have on the other
company, including the ability of BlowOut to focus on growth rather than
short-term profits or returns to Rentrak and to develop further alternative
sources of rental and sales product. Two different businesses would also
present potential equity investors and lenders with entities that are easier
to understand and follow. It is expected that separation of the two companies
will also strengthen Rentrak's financial statements, while relieving BlowOut
of any burden to dividend cash to a parent entity. Furthermore, Rentrak and
BlowOut believe that separation of the two companies will provide a more
direct link between each company's performance and its stock price, thereby
enabling employees of each company to realize, through stock incentive and
other similar plans, the results of their efforts, which might otherwise be
adversely affected by the performance of one or the other entities if
combined.
Rentrak also has determined to dispose of the operations of its Pro Image
subsidiary (the "Pro Image Disposition"). Pro Image is a franchisor and
operator of retail stores which sell licensed sports apparel. The Pro Image
Disposition, like the Distribution, is intended to allow Rentrak to focus on
its core PPT business. Rentrak anticipates that the Pro Image Disposition will
be effected through a series of dispositions of all or substantially all of
Pro Image's assets. While there can be no assurances as to the amount of
proceeds which Rentrak will realize pursuant to the Pro Image Disposition, or
the liabilities that Rentrak will be required to absorb as a result of the Pro
Image Disposition, Rentrak does not believe that the Pro Image Disposition
will have a material adverse effect on its liquidity, results of operation or
financial condition.
DISTRIBUTION AGENT
The distribution agent is U.S. Stock Transfer Corporation ("Distribution
Agent"), 1745 Gardena Avenue, Glendale, California 91204, telephone (818) 502-
1404.
MANNER OF EFFECTING THE DISTRIBUTION
The general terms and conditions relating to the Distribution are set forth
in the Distribution Agreement (the "Distribution Agreement") that will be
executed on or prior to the Distribution Date between Rentrak and the Company.
Rentrak will effect the Distribution on the Distribution Date by delivering
1,457,343 shares of the 1,698,942 shares of the BlowOut Common Stock owned by
it to the Distribution Agent for distribution to the holders of record of
Rentrak Common Stock as of the close of business on the Record Date. The
Distribution will be made on the basis of one share of the BlowOut Common
Stock for every 8.34 shares of Rentrak Common Stock held as of the close of
business on the Record Date. The shares of the BlowOut Common Stock will be
fully paid and nonassessable, and the holders thereof will not be entitled to
preemptive rights. See "Description of Company Capital Stock." It is expected
that certificates representing shares of the BlowOut Common Stock will be
mailed to holders of Rentrak Common Stock on the Distribution Date or as soon
as practicable thereafter.
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HOLDERS OF RENTRAK COMMON STOCK SHOULD NOT SEND CERTIFICATES TO THE COMPANY,
RENTRAK OR THE DISTRIBUTION AGENT. THE DISTRIBUTION AGENT WILL MAIL THE STOCK
CERTIFICATES REPRESENTING SHARES OF BLOWOUT COMMON STOCK ON THE DISTRIBUTION
DATE OR AS SOON AS PRACTICABLE THEREAFTER. RENTRAK STOCK CERTIFICATES WILL
CONTINUE TO REPRESENT SHARES OF RENTRAK COMMON STOCK AFTER THE DISTRIBUTION IN
THE SAME AMOUNT SHOWN ON THE CERTIFICATES.
No certificates or scrip representing fractional interests in shares of the
BlowOut Common Stock ("Fractional Shares") will be issued to holders of
Rentrak Common Stock as part of the Distribution. The Distribution Agent,
acting as agent for holders of Rentrak Common Stock otherwise entitled to
receive in the Distribution certificates representing Fractional Shares, will
aggregate and sell in the open market all Fractional Shares at then prevailing
prices and distribute the net proceeds to the stockholders entitled thereto.
Rentrak will pay the fees and expenses of the Distribution Agent in connection
with such sales.
No holder of Rentrak Common Stock will be required to pay any cash or other
consideration to Rentrak for the shares of the BlowOut Common Stock to be
received in the Distribution or to surrender or exchange shares of Rentrak
Common Stock or to take any action in order to receive the BlowOut Common
Stock pursuant to the Distribution.
CONDITIONS; TERMINATION
The Rentrak Board has conditioned the Distribution upon, among other things,
(i) Rentrak having modified its existing stock option plans and/or adjusted
option grants thereunder to ensure that the Distribution does not adversely
affect the current holders of options under those plans; (ii) Rentrak having
taken all action required under all outstanding warrants to purchase Rentrak
Common Stock; (iii) the BlowOut Common Stock having been approved for listing
on NASDAQ/SCM; (iv) the Registration Statement on Form 10 with respect to the
BlowOut Common Stock (the "Form 10 Registration Statement") having become
effective under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"); and (v) receipt of all necessary consents to the Distribution from
third parties. The Company believes that there are no individual consents
which are material to the continuing operation of the business of BlowOut or
Rentrak that are required to be obtained but which have not been obtained. Any
of these conditions may be waived by the Rentrak Board; provided, however,
that certain of the conditions, including (iii), (iv) and (v) above, may only
be waived with the consent of the Company. Even if all of the above conditions
are satisfied, the Rentrak Board has reserved the right to abandon, defer or
modify the Distribution or the elements of the Distribution at any time prior
to the Distribution Date. See "The Distribution--Relationship Between the
Company and Rentrak After the Distribution--Distribution Agreement."
RESULTS OF THE DISTRIBUTION
After the Distribution, BlowOut will be a separate public company which will
own and operate the business conducted by it prior to the Distribution.
Immediately after the Distribution, the Company expects to have approximately
440 holders of record of BlowOut Common Stock and to have approximately
2,433,330 shares of BlowOut Common Stock outstanding, in each case based on
the number of record shareholders and outstanding shares of Rentrak Common
Stock as of the close of business on October 31, 1996, the distribution ratio
of one share of BlowOut Common Stock for every 8.34 shares of Rentrak Common
Stock, the retention by Rentrak of 241,599 shares (approximately 9.9%) of
BlowOut Common Stock, and the continued holding by other BlowOut shareholders
of 734,388 shares (approximately 30.2%) of BlowOut Common Stock. The
Distribution will not affect the number of outstanding shares of Rentrak
Common Stock or any rights of Rentrak shareholders.
RELATIONSHIP BETWEEN THE COMPANY AND RENTRAK AFTER THE DISTRIBUTION
For the purpose of governing certain of the ongoing relationships between
the Company and Rentrak after the Distribution and to provide mechanisms for
an orderly transition, the Company and Rentrak have entered or
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will enter into the various agreements, and will adopt policies, as described
in this section. The following summaries set forth the material terms of the
documents described therein.
Distribution Agreement. Prior to the Distribution Date, the Company and
Rentrak will enter into the Distribution Agreement which provides for, among
other things, the principal corporate transactions required to effect the
Distribution and certain other agreements governing the relationship between
BlowOut and Rentrak with respect to or in consequence of the Distribution.
The Distribution Agreement provides for assumptions of liabilities and
cross-indemnities designed to allocate, effective as of the Distribution Date,
financial responsibility for the liabilities arising out of or in connection
with the business of the operating "store within a store" retail video outlets
that rent and sell video cassettes, video games and other related products
("BlowOut Business") to the Company and its subsidiaries, and financial
responsibility for the liabilities arising out of or in connection with
Rentrak's other business, including distributing video cassettes to home video
specialty stores under the PPT System ("Rentrak Business") to Rentrak and its
subsidiaries.
The indemnities described above will be limited to the extent that the
indemnitee receives insurance proceeds or a tax benefit with respect to the
claimed loss. The Distribution Agreement sets forth procedures for enforcing
the indemnification provisions described above.
Certain Employee Benefit Plan Matters. In connection the certain employee
compensation and benefit matters, the Distribution Agreement provides that,
with certain exceptions, BlowOut and its subsidiaries will be responsible for
all liabilities to any employee of Rentrak or its subsidiaries as of the
Distribution Date (including BlowOut) who is or will become an employee of
BlowOut or its subsidiaries after the Distribution ("Separated Employees").
Further, except as specifically provided therein, the Distribution Agreement
will not affect any employee benefit plan or compensation arrangement (i) of
Rentrak in respect of employees of Rentrak and its subsidiaries who are not
Separated Employees or (ii) of BlowOut or its subsidiaries which were
maintained by BlowOut or its subsidiaries prior to the Distribution Date.
Pursuant to the Distribution Agreement, the exercise price of options to
purchase Rentrak Common Stock (including those held by Separated Employees)
and the number of shares of Rentrak Common Stock subject to such options
generally will be adjusted by Rentrak based on the value of BlowOut Common
Stock at the Distribution. Options to purchase Rentrak Common Stock that are
held by Separated Employees will continue to vest so long as such Separated
Employees are employed by BlowOut or its subsidiaries as if the Distribution
had not occurred.
The Distribution Agreement requires BlowOut to establish a 401(k) plan on
behalf of employees of BlowOut and its subsidiaries. Following the
Distribution Date, Rentrak will cause the Rentrak 401(k) Plan to transfer to
the BlowOut 401(k) Plan assets with a value equal to the value of the account
balances of, and liabilities with respect to, the Separated Employees, and
thereafter the Separated Employees will cease to participate in the Rentrak
401(k) plan.
The Distribution Agreement provides that through December 31, 1996,
Separated Employees and all other employees of Rentrak and its subsidiaries
will continue to be covered by existing health, dental, life and workers'
compensation insurance programs. Thereafter, Rentrak and BlowOut will maintain
separate insurance programs for their respective employees.
Rentrak is the sponsor of an employee stock purchase plan ("ESPP") under
which employees may purchase Rentrak Common Stock through an arrangement with
a brokerage firm. Employees may make such purchases on a monthly basis through
payroll deduction. Rentrak's only connection with the plan was to arrange the
program with the brokerage firm and Rentrak pays the brokerage commissions on
the purchases of stock by employees and performs certain administrative
functions. The ESPP will continue in effect after the Distribution.
Participants in the ESPP will receive the Distribution in the same manner as
all other Rentrak shareholders.
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Participants in the ESPP who become Separated Employees will no longer
participate in the ESPP and may withdraw their investments from the ESPP after
the Distribution Date.
Tax Sharing Agreement. The Company and Rentrak will allocate between
themselves the rights and obligations with respect to deficiencies and refunds
of federal, state and other income or franchise taxes relating to the
Company's business for tax years prior to the Distribution and with respect to
certain tax attributes of the Company after the Distribution. All tax refunds
and net operating loss carry forwards, if any, will be allocated solely to
Rentrak. In general, with respect to periods ending on or before the last day
of the year in which the Distribution occurs, Rentrak is responsible for (i)
filing both consolidated federal tax returns for the Rentrak affiliated group
and combined or consolidated state tax returns for any group that includes a
member of the Rentrak affiliated group, including in each case the Company and
its subsidiaries for the relevant periods of time that such companies were
members of the applicable group; and (ii) paying the taxes relating to such
returns (including any subsequent adjustments resulting from the
redetermination of such tax liabilities by the applicable taxing authorities).
The Company will reimburse Rentrak for a defined portion of such taxes
relating to the Company. The Company is responsible for filing returns and
paying taxes related to the Company for subsequent periods. The Company and
Rentrak have agreed to cooperate with each other and to share information in
preparing such tax returns and in dealing with other tax matters.
Services Agreement. The Company and Rentrak will agree to provide certain
services to each other for a transitional period of at least six months on an
as-needed basis. The fee for such services will be based on rates designed to
reflect the cost for providing such services, including reimbursement of
certain direct out of pocket expenses. The Company and Rentrak will be free to
procure such services from outside vendors or may develop an in- house
capability in order to provide such services internally. The transitional
services to be provided to the Company pursuant to such agreement may include
store audit services, computer services, financial modelling services,
insurance coverage, or any other similar services that the Company may
require. The transitional services to be provided to Rentrak pursuant to such
agreement include payroll processing services and management of employee
benefit programs. Such services will be provided as needed beyond the general
transition period set forth above.
LISTING AND TRADING OF THE BLOWOUT COMMON STOCK
There is not currently a public market for the BlowOut Common Stock. Prices
at which the BlowOut Common Stock may trade prior to the Distribution on a
"when-issued" basis or after the Distribution cannot be predicted. Until the
BlowOut Common Stock is fully distributed and an orderly market develops, the
prices at which trading in such stock occurs may fluctuate significantly. The
prices at which the BlowOut Common Stock trades will be determined by the
marketplace and may be influenced by many factors, including, among others,
the depth and liquidity of the market for the BlowOut Common Stock, investor
perception of the Company and the industry in which the Company participates,
the Company's dividend policy and general economic and market conditions. Such
prices may also be affected by certain provisions of the Company's Certificate
of Incorporation and Bylaws, as each will be in effect following the
Distribution, which may have an anti-takeover effect. See "Risk Factors--No
Dividends" and "--Anti-Takeover Provisions."
The Company has made application for qualification of the BlowOut Common
Stock on the NASDAQ/SCM and will trade under the symbol BLWT. The Company
initially will have approximately 470 stockholders of record including
Rentrak, the Rentrak stockholders receiving shares in the Distribution and the
BlowOut Minority. Approval of the application for qualification will be
conditioned upon the shares maintaining a bid price of $3.00 per share or more
throughout the first day of "when issued" trading. For certain information
regarding options to purchase the BlowOut Common Stock that will be
outstanding after the Distribution, see "The Distribution--Relationship
Between the Company and Rentrak After the Distribution--Certain Employee
Benefit Plan Matters."
It is the Company's belief that the BlowOut Common Stock distributed to
Rentrak's shareholders in the Distribution will be freely transferable, except
for (i) securities received by persons who may be deemed to be
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"affiliates" of Rentrak within the meaning of Rule 144, in which case such
persons may not publicly offer or sell the BlowOut Common Stock received in
connection with the Distribution except pursuant to a registration statement
under the Securities Act or pursuant to Rule 144, and (ii) securities received
by persons that were holders of restricted shares of Rentrak Common Stock in
which case such holders will receive BlowOut Common Stock containing the same
such restrictions.
The Company expects a "when-issued" trading market in BlownOut Common Stock
to develop prior to the Distribution Date. In when-issued trading, contracts
for the purchase and sale of stock prior to the issuance of such stock are
made in the same manner as for issued shares, except that when-issued
contracts are settled by delivery of and payment for the shares on a date
chosen by the particular exchange or quotation system on which such shares are
to be listed. Ordinarily, in connection with the distribution of stock such as
the Distribution, the date fixed for settlement of when-issued contracts
relating to such stock is the fifth business day after distribution of such
stock. Stockholders who wish to effect a when-issued trade in BlowOut Common
Stock should consult their brokers for additional details.
REPORTS OF FINANCIAL ADVISORS
Solvency Opinion. The Company Board has engaged Houlihan Lokey to render an
opinion as to whether, assuming the Distribution has been consummated as
proposed, immediately after and giving effect to the Distribution: (a) on a
pro forma basis, the fair value and present fair saleable value of BlowOut's
assets would exceed BlowOut's stated liabilities and identified contingent
liabilities; (b) BlowOut should be able to pay its debts as they become
absolute and mature and due in the usual course of business; and (c) the
capital remaining in BlowOut after the Distribution would not be unreasonably
small for the business in which BlowOut is engaged, as management has
indicated it is now conducted and is proposed to be conducted following the
consummation of the Distribution, (the "BlowOut Solvency Opinion").
The following summary discusses the material analysis of such opinion.
The Rentrak Board also has engaged Houlihan Lokey to render an opinion as to
whether, assuming the Distribution has been consummated as proposed,
immediately after and giving effect to the Distribution and the Pro Image
Disposition: (a) on a pro forma basis, the fair value and present fair
saleable value of Rentrak's assets would exceed Rentrak's stated liabilities
and identified contingent liabilities; (b) Rentrak should be able to pay its
debts as they become absolute and mature and due in the usual course of
business; and (c) the capital remaining in Rentrak after the Distribution
would not be unreasonably small for the business in which Rentrak is engaged,
as management has indicated it is now conducted and is proposed to be
conducted following the consummation of the Distribution, (the "Rentrak
Solvency Opinion," and together with the BlowOut Solvency Opinion, the
"Solvency Opinions"). The following summary discusses the material analysis of
such opinion.
It is Houlihan Lokey's opinion that, assuming the Transaction had been
consummated as proposed, immediately after and giving effect to the
Transaction:
(a) on a pro forma basis, the fair value and present fair saleable value
of BlowOut's assets would exceed BlowOut's stated liabilities and
identified contingent liabilities;
(b) BlowOut should be able to pay its debts as they become absolute and
mature and due in the usual course of business; and
(c) The capital remaining in BlowOut after the Transaction would not be
unreasonably small for the business in which BlowOut is engaged, as
management has indicated it is now conducted and is proposed to be
conducted throughout the Projection Period following the consummation of
the Transaction.
Additionally, it is Houlihan Lokey's opinion that, assuming the Transaction
had been consummated as proposed, immediately after and giving effect to the
Transaction:
(a) on a pro forma basis, the fair value and present fair saleable value
of Rentrak's assets would exceed Rentrak's stated liabilities and
identified contingent liabilities;
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(b) Rentrak should be able to pay its debts as they become absolute and
mature and due in the usual course of business; and
(c) the capital remaining in Rentrak after the BlowOut Spinoff would not
be unreasonably small for the business in which Rentrak is engaged, as
management has indicated it is now conducted and is proposed to be
conducted throughout the Projection Period following the consummation of
the BlowOut Spinoff.
The preparation of a solvency opinion is a complex analytical process
involving various determinations as to the most appropriate and relevant
methods of financial analysis and application of those methods to the
particular circumstances and is therefore not readily susceptible to summary
description. Houlihan Lokey's opinions are based on the business, economic,
market and other conditions as they existed as of the date of its opinion. In
rendering its opinions, Houlihan Lokey has relied upon and assumed, without
independent verification, the accuracy, completeness and fairness of all the
financial and other information reviewed by Houlihan Lokey for purposes of its
opinions, and the financial results and projections provided to Houlihan Lokey
by the Company and Rentrak have been reasonably prepared and reflect the best
current available estimates of the financial results, condition, and prospects
of the Company and Rentrak. In its analysis, Houlihan Lokey made numerous
assumptions with respect to the Company and Rentrak, industry performance,
general business, economic, market and financial conditions and other matters,
many of which are beyond the control of the Company or Rentrak. The estimates
contained in such analyses are not necessarily indicative of actual values or
predictive of future results or values, which may be more or less favorable
than suggested by such analyses. The full text of Houlihan Lokey's written
opinions, which set forth the assumptions made, procedures followed and
matters considered, is attached hereto as Annex I, and is incorporated herein
by reference.
Houlihan Lokey is a nationally recognized investment banking firm that is
continually engaged in the providing of financial advisory services in
connection with mergers and acquisitions, leveraged buyouts, business
valuations for a variety of regulatory and planning purposes,
recapitalizations, financial restructurings, and private placements of debt
and equity securities. Houlihan Lokey has no material prior relationship with
Rentrak, BlowOut, or their affiliates.
In connection with the Distribution, BlowOut has paid Houlihan Lokey a fee
of $30,000 and will pay an additional fee of $35,000 upon delivery of the
BlowOut Solvency Opinion, and Rentrak has paid Houlihan Lokey a fee of $5,000
and will pay an additional $45,000 upon delivery of the Rentrak Solvency
Opinion. No portion of Houlihan Lokey's fees were contingent upon its
rendering the Solvency Opinion(s), or the successful completion of the
Distribution or any related transaction. BlowOut has also agreed to indemnify
Houlihan Lokey and related persons against certain liabilities, including
liabilities under Federal securities laws, arising out of the engagement of
Houlihan Lokey, and reimburse Houlihan Lokey for certain expenses. No
restrictions or limitations were imposed by BlowOut or Rentrak upon Houlihan
Lokey with respect to its investigation made or the procedures followed by
Houlihan Lokey in rendering the Solvency Opinions.
Houlihan Lokey was retained by the Company and Rentrak on behalf of their
respective Boards of Directors. Houlihan Lokey's engagement contracts with
both companies provide that neither Houlihan Lokey's verbal conclusions nor
its solvency opinions will be used for any purpose other than in connection
with the Transaction, and such contracts explicitly state "The Solvency
Opinion will contain language substantially as follows: "This Opinion is
furnished solely for your [the Board's] benefit and may not be relied upon by
any other person without our express, prior written consent." ' Houlihan Lokey
has not consented, and will not consent, to reliance by any other person,
including security holders. It is not free from doubt whether a court would
conclude that a company's stockholders may rely on advice rendered by a
financial advisor to such company's board of directors when the engagement of
the financial advisor contains a limitation on the engagement such as that set
forth above. If necessary, a determination concerning the availability of a
defense based on this limitation would be made by a court of competent
jurisdiction. The foregoing limitation does not purport to affect the rights
or responsibilities of the Board of Directors or Houlihan Lokey under
applicable federal securities laws.
A copy of each of the Solvency Opinions, which sets forth the assumptions
made, the matters considered and certain limitations on the scope of review
undertaken by Houlihan Lokey, is attached as Annex I to this
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Information Statement. The summary of the Solvency Opinions set forth in this
Information Statement is qualified in its entirety by reference to the full
text of the Solvency Opinions attached as Annex I hereto.
Valuation. The Rentrak Board of Directors has retained Pennsylvania Merchant
Group Ltd ("PMG") as its financial advisor in connection with the
Distribution. The Rentrak Board retained PMG to provide a valuation of BlowOut
as a separate public company to assist the Rentrak Board of Directors in
determining, among other things, the number of shares to distribute to the
Rentrak shareholders and the potential tax effect of the Distribution to
Rentrak shareholders and to assist with the Company's application to list
BlowOut Common Stock on the NASDAQ/SCM. The report of PMG sets forth that
company's estimation of the value of BlowOut based upon financial analyses
performed by PMG, and should not be construed as an opinion concerning the
market value of the Company or of the price at which the shares of BlowOut
Common Stock may trade.
PMG is a national investment banking and financial advisory firm with
experience in the valuation of businesses and their securities in connection
with divestitures, mergers and acquisitions, negotiated underwritings,
secondary distributions of securities, private placements and valuations for
corporate or other purposes. The Rentrak Board selected PMG as its financial
advisor based upon PMG's expertise in such matters.
In arriving at their valuation, PMG relied upon and assumed, without
independent verification, the accuracy, completeness and fairness of all of
the financial and other information that was provided to them by Rentrak and
the Company. With respect to the financial projections supplied to them, PMG
assumed that they had been reasonably prepared on a basis reflecting the best
currently available estimates and judgements of the management of the Company
as to the future operating and financial performance of the Company. PMG did
not make any independent evaluation of the assets or liabilities of the
Company nor did they verify any of the information reviewed by them.
As compensation for PMG's services as financial advisor in connection with
the Distribution, PMG is entitled to receive a fee of $250,000 (the
"Distribution Fee") upon the successful completion of the Distribution. PMG
also is entitled to a $10,000 monthly advisory fee, the payment of which is
not conditioned upon the successful completion of the Distribution, provided
that, if the Distribution is completed, 50% of the aggregate amount of the
monthly advisory fees will be credited against the Distribution Fee owed to
PMG. To date, PMG has been paid an aggregate of $50,000 in monthly advisory
fees. PMG also is entitled to reimbursement for its reasonable out-of-pocket
expenses incurred in connection with the Distribution. Rentrak or a subsidiary
has agreed to pay PMG substantially the same fees for financial advisory
services in connection with, and upon the successful completion of, the
proposed divestiture of such subsidiary of Rentrak. Other than services
provided in connection with the foregoing, PMG has not had any material
relationship with either Rentrak or the Company during the past two years. In
1991, in connection with an unrelated transaction, Rentrak granted PMG a
warrant to purchase 147,500 shares of Rentrak Common Stock at an exercise
price of $8.90 per share that expires in 1997. Such warrant is not being
adjusted in connection with the Distribution. It is possible that either
Rentrak or the Company may engage PMG to provide financial advisory services
in connection with future transactions. No restrictions or limitations were
imposed by BlowOut or Rentrak upon PMG with respect to its investigation made
or the procedures followed by PMG in rendering its valuation of BlowOut as a
separate company.
The following is a summary of the material financial analyses performed by
PMG in arriving at its valuation.
Analysis of Certain Other Publicly Traded Companies. PMG compared certain
historical earnings and operating and financial ratios of BlowOut to the
corresponding data and ratios of certain other companies in the video rental
business with publicly traded securities. The companies considered were
Hollywood Entertainment Corporation, Moovies, Movie Gallery, Video Update and
West Coast Entertainment. The data and ratios considered by PMG included
market capitalization as a multiple of the latest twelve month revenues and
operating profit and price to earnings ratios. Multiples of market
capitalization to revenues ranged from 1.1x to 2.3x for the companies
reviewed, compared to 0.6x for BlowOut. Multiples of market capitalization to
operating profit for the companies reviewed ranged from 3.7x to 17.4x, and
price to earnings ratios for the companies reviewed from 10.0x to 29.0x. Since
the Company's operating profit and earnings for the latest twelve months were
negative, these multiples were not meaningful.
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While the companies used in this analysis are similar in some respect to
BlowOut, none of them are directly comparable to BlowOut, making a direct
comparison of trading multiples for valuation purposes less meaningful than
would be the case in industries where there are a number of similar
competitors. In addition, BlowOut's historical financial performance has been
significantly below the financial results of these companies. In particular,
all of the comparable companies have experienced substantial revenue growth
over the past few years due to an aggressive store growth and acquisition
strategy and all have positive operating margins. In comparison, BlowOut has
experienced slower revenue growth and has not been profitable to date. As a
result, PMG discounted the financial ratios of the comparable public companies
by 50% to reflect their superior revenue growth and profitability. In
addition, PMG applied a 20% spin-off discount to reflect the lack of liquidity
and lack of new institutional sponsorship of BlowOut Common Stock. As a result
of the foregoing analysis, the implied public equity valuation of BlowOut is
approximately $13.3 million.
Discounted Cash Flow Analysis. PMG performed a discounted cash flow analysis
using certain financial projections of the Company prepared by the Company.
However, due to the fact that the Company is projecting negative cash flow
until 1997, PMG concluded that the discounted cash flow approach is not
meaningful.
Other Analyses. In addition to the valuation methods discussed above, PMG
also reviewed the Company's equity investments to date. The Company recently
converted two promissory notes having outstanding principal amounts of $1.0
million each, previously issued to Bill Levine, a director of the Company and
Rentrak, and to Culture Convenience Club ("CCC"), an affiliate of Muneaki
Masuda, a director of the Company and Rentrak, into 121,789 shares of BlowOut
Common Stock, representing approximately 5.0% of the outstanding shares of
BlowOut Common Stock for each note. The Company also recently issued 362,931
shares of BlowOut Common Stock, representing approximately 14.9% of the
outstanding shares of BlowOut Common Stock, to CCC for $2.98 million in cash.
The terms of these investments would imply that BlowOut should be valued at
approximately $20.0 million. PMG believes that BlowOut's current valuation
should be less than this valuation, due to the fact that the Company has
slowed the growth in new store openings substantially from earlier plans,
which ultimately impacts revenue growth and profitability.
Although PMG relied on all of the above analyses in arriving at its
valuation, it put greater weight on the comparable company analysis. Based on
the foregoing, PMG's valuation of the Company is approximately $13.3 million.
WARRANTS TO PURCHASE RENTRAK COMMON STOCK
As of October 8, 1996, Rentrak had issued outstanding warrants to purchase
an aggregate of 4,756,889 shares of Rentrak Common Stock at exercise prices
ranging from $7.00 to $9.50 per share (including warrants which, by their
terms, become exercisable only upon the satisfaction of certain conditions),
with a weighted average exercise price of approximately $7.31. The provisions
of certain of the warrant agreements with respect to such warrants require
that certain adjustments to the number of shares subject to the warrants and
to the exercise price be made to reflect the Distribution. As a result of such
adjustments, and based on a value of BlowOut Common Stock of $5.50 per share,
immediately following the Distribution and a market price of Rentrak Common
Stock of $4.25 per share (the closing price on September 5, 1996), such
warrants would represent the right to purchase an aggregate of 5,403,208
shares of Rentrak Common Stock at exercise prices ranging from $6.20 to $8.90,
with a weighted average exercise price of approximately $6.39. The adjustments
will be made based upon the value of BlowOut Common Stock at the Distribution.
See "The Distribution--Opinions of Financial Advisors." All other terms of the
warrants, including the expiration date, will continue in effect as if the
Distribution had not occurred.
FEDERAL INCOME TAX ASPECTS OF THE DISTRIBUTION
The following discussion summarizes all of the material United States
federal income tax consequences of the Distribution to Rentrak, the holders of
Rentrak Common Stock and the Company, but does not purport to be a complete
analysis of all of the potential tax consequences thereof. The following
discussion is based on the
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Internal Revenue Code of 1986, as amended (the "Code"), and the regulations,
judicial decisions and administrative rulings thereunder, all as in effect on
the date hereof. There can be no assurance that future changes in applicable
law or administrative and judicial interpretations thereof will not alter the
tax consequences described below or that the Internal Revenue Service (the
"IRS") will agree with the tax consequences described herein. Neither Rentrak
nor the Company currently intends to request a ruling from the IRS concerning
tax effects of the Distribution.
The following summary is for general information only and does not address
tax considerations relevant to persons or entities in special tax situations,
such as dealers in securities, foreign corporations and persons who are not
citizens or residents of the United States, or any persons or entities subject
to special tax rules such as tax-exempt entities, insurance companies and
financial institutions, nor does this summary address the effect of any
applicable foreign, state, local or other tax laws.
EACH PERSON SHOULD CONSULT HIS OR HER OWN TAX ADVISOR CONCERNING THE
PARTICULAR TAX CONSEQUENCES OF THE DISTRIBUTION AND RELATED TRANSACTIONS,
INCLUDING THE APPLICABILITY AND EFFECT OF ANY FEDERAL, STATE, LOCAL OR FOREIGN
TAX LAWS AND ANY PROPOSED CHANGES IN APPLICABLE TAX LAWS.
Tax Consequences to Holders of Rentrak Common Stock. The Distribution will
constitute a taxable distribution to the holders of Rentrak Common Stock. Each
holder of Rentrak Common Stock will be treated as receiving a taxable
distribution in the amount of the fair market value, as of the Distribution
Date, of the BlowOut Common Stock received by such holder. This amount will be
treated as (i) a dividend, taxable as ordinary income, to the extent paid from
Rentrak's current and accumulated earnings and profits; then (ii) the amount
of the Distribution, if any, in excess of the amount described in clause (i)
will be applied as a reduction (but not below zero) to the tax basis of the
Rentrak Common Stock held by such holder, and this portion of the Distribution
will not result in the holder recognizing current taxable income; and (iii) if
the amount of the Distribution exceeds the amounts described in clauses (i)
and (ii) above, such excess will be treated as taxable gain from the exchange
of Rentrak Common Stock. Any gain referred to in clause (iii) above will
constitute capital gain, provided the Rentrak Common Stock is held by the
recipient of the Distribution as a capital asset. It is currently expected
that Rentrak will have positive earnings and profits for purposes of the
Distribution which exceed the value of the Distribution. If this is the case,
then the Distribution will constitute a dividend for federal income tax
purposes, and the entire amount of the Distribution will be taxable as
described in clause (i) above.
It is currently expected that holders of Rentrak Common Stock will recognize
dividend income with respect to the Distribution estimated to be $0.55 per
each share of Rentrak Common Stock. This estimate is based on a value of $5.50
per share of BlowOut Common Stock. Such valuation is not necessarily
indicative of the prices at which the BlowOut Common Stock will trade. Neither
Rentrak nor BlowOut, nor any of their advisors or any other person makes any
representation as to the present or future value of BlowOut Common Stock. See
"Risk Factors--No Current Market for the BlowOut Common Stock." Based on the
foregoing, each holder of Rentrak Common Stock would have an initial tax basis
in the shares of BlowOut Common Stock received in the Distribution equal to
$5.50 per share of BlowOut Common Stock. Promptly following the end of
calendar year 1996, Rentrak will provide each shareholder of Rentrak as of the
record date for the Distribution a Form 1099 that includes the value assigned
to the shares of BlowOut Common Stock subject to the Distribution.
Tax Consequences to Rentrak. The Distribution is to be made using shares of
BlowOut Common Stock owned beneficially by Rentrak. Such shares are owned by
Rentrak and by a wholly owned subsidiary of Rentrak. Immediately prior to the
Distribution, the subsidiary will transfer to Rentrak at least that number of
shares of BlowOut Common Stock that together with shares held directly by
Rentrak will equal the shares of BlowOut Common Stock needed to effect the
Distribution. The transfer of shares of BlowOut Common Stock to Rentrak could
result in a deferred taxable gain to the distributing entity to the extent, if
any, that the fair market value of the BlowOut Common Stock that is
distributed exceeds the subsidiary's adjusted tax basis in the distributed
BlowOut Common Stock. To the extent a deferred gain existed it would be
triggered upon the Distribution of
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such shares to the shareholders. It is currently expected that the fair market
value of the BlowOut Common Stock to be distributed will not exceed the
subsidiary's tax basis therefor. See "The Distribution--Opinions of Financial
Advisors."
Upon the Distribution, Rentrak will recognize taxable gain to the extent, if
any, that the fair market value of the BlowOut Common Stock that is
distributed exceeds Rentrak's adjusted tax basis of the distributed BlowOut
Common Stock. If on the Distribution Date the fair market value of the BlowOut
Common Stock is less than Rentrak's tax basis for this stock, Rentrak will not
recognize any taxable gain but will not be entitled to any deductible loss. It
is currently expected that the fair market value of the BlowOut Common Stock
to be distributed will not exceed Rentrak's tax basis therefor.
Tax Consequences to the Company. Although the BlowOut Common Stock will be
distributed pursuant to the Distribution, the Company itself will not directly
engage in any transactions. Accordingly, the Distribution should not result in
recognition of any income or loss for federal tax purposes by the Company.
REASONS FOR FURNISHING THE INFORMATION STATEMENT
This Information Statement is being furnished by Rentrak solely to provide
information to Rentrak shareholders who will receive the BlowOut Common Stock
in the Distribution. It is not, and is not to be construed as, an inducement
or encouragement to buy or sell any securities of Rentrak or the Company. The
information contained in this Information Statement is believed by Rentrak and
the Company to be accurate as of the date set forth on its cover. Changes may
occur after that date, and neither the Company nor Rentrak will update the
information except in the normal course of their respective public disclosure
practices.
REGULATORY APPROVALS
The Company does not believe that any material federal or state regulatory
approvals must be obtained in connection with the Distribution.
ACCOUNTING TREATMENT
The historical financial statements of the Company present its financial
position, results of operations and cash flows as if it were a separate entity
for all periods presented. The financial statements also reflect (from the
date of acquisition) two acquisitions made by Rentrak which were subsequently
contributed to the Company, utilizing "reorganization of entities under common
control" accounting. Footnote 1 of the Company's audited financial statements
for the year ended December 31, 1995 contained elsewhere in this Information
Statement contains additional information on the basis of presentation.
RELATED PARTY TRANSACTIONS
The following summaries of agreements and transactions set forth the
material terms of the agreements and transactions described therein. Due to
the relationship between Rentrak and the Company, the terms on which certain
services have been provided to the Company by Rentrak or its affiliates have
not been necessarily determined by arm's-length negotiations; however, the
Company believes that each of the agreements and transactions set forth below
are substantially similar to those that could be negotiated with unaffiliated
third parties.
PPT AGREEMENT
The Company currently is participating in the PPT System under an agreement
with Rentrak dated March 15, 1996 (the "PPT Agreement"). The Company has been
a participant in Rentrak's PPT System since January 1993. Under the PPT
System, participating video retailers ("Retailers") lease to consumers video
cassettes
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which, in turn, are leased to the Retailer by Rentrak for a one-time fee plus
a percentage of the revenues generated by the Retailer from rental or sales of
the video cassettes to consumers. The Company incurred fees and costs of
approximately $2.7 million to Rentrak in connection with the PPT System for
the year ended December 31, 1995 and approximately $3.1 million for the nine
months ended September 30, 1996.
The PPT Agreement provides that Rentrak is the exclusive supplier of product
on a revenue sharing basis to the Company. Rentrak has a right of first
refusal on any non-video cassette merchandise that the Company proposes to
obtain from another supplier. Moreover, the Company is obligated to purchase
enough merchandise from Rentrak that the fees payable by the Company under the
PPT Agreement are at least 11% of the Company's annual gross retail rental
revenues. The Company must pay any deficiency plus a percentage of such
deficiency as a penalty. Rentrak may terminate the PPT Agreement at any time
upon notice to the Company. The Company may terminate the PPT Agreement upon a
breach by Rentrak and failure to cure within 30 days after receipt of written
notice. The PPT Agreement has a term of 20 years beginning in March 1996.
Under the PPT Agreement, the Company's stores install and/or maintain Rentrak
software to be able to participate in the PPT System. Rentrak and the Company
believe the terms of the PPT Agreement are substantially similar to Rentrak's
PPT arrangements with other retail video stores in which Rentrak has made
sizable investments.
LICENSE AGREEMENT
The Company currently operates most of its stores under the name "BlowOut
Video" pursuant to a license arrangement with Rentrak. The Company and Rentrak
entered into a new license agreement ("License") for the name "BlowOut Video"
on March 15, 1996, which was subsequently amended on June 25, 1996. Rentrak
granted the Company a twenty year nonexclusive, nontransferable license to use
the name "BlowOut Video" for a royalty of 1.667% of aggregate net revenues
from all of the Company's stores, but not to exceed 20% of the Company's pre-
tax net income through March 31, 2001; thereafter, the royalty would be an
amount equal to the greater of (i) 1.667% of such aggregate net revenues, but
not to exceed 20% of the Company's pre-tax net income, or (ii) one percent of
the aggregate net revenues from all of the Company's stores without regard to
such pre-tax net income. If such royalties fail to meet specified levels
during the first five years of the term of the License, Rentrak, at its sole
option, could terminate the License. Rentrak currently uses and intends to
continue using the name "BlowOut Video" in connection with a separate video
cassette resale business that it operates through wholly-owned subsidiaries.
Rentrak currently operates three video cassette retail outlets solely to
dispose of used video cassettes returned to Rentrak by its customers. These
outlets are located in New York, New York; Pittsburgh, Pennsylvania; and
Seattle, Washington. Rentrak has advised the Company that it intends to close
the outlet located in Seattle, Washington and open a similar outlet in
Orlando, Florida. None of such outlets is located within a department, grocery
or other chain store and the Company does not operate a store in any of these
locations. No royalty has accrued or is payable through September 30, 1996,
under this License Agreement.
SUBLEASES
In March 1996, the Company entered into a sublease with Rentrak for
approximately 2,000 square feet of office space at Rentrak's current Portland,
Oregon headquarters. The sublease expires on December 31, 1996. Rentrak is
scheduled to move its headquarters to a new office building in Portland,
Oregon by January 1, 1997. The Company will sublease office space for a period
of 10 years in the new facility at a rent of approximately $7,100 per month
for the first five years, and approximately $7,650 per month for the last five
years. Upon taking occupancy of the new subleased space, Rentrak will release
the Company from all of its obligations relating to space in the old facility
under the March 1996 sublease. Both the Company Board and the Rentrak Board
believe these rental terms to be competitive with those in the Portland,
Oregon rental market.
The Company currently uses, and intends to enter into a sublease for,
warehouse space at Rentrak's Wilmington, Ohio warehouse (approximately 15,000
square feet). The Company currently uses this space on a month to month basis
with a monthly rent, varying according to use, of approximately $6,500 on
average.
23
<PAGE>
RENTRAK INDEBTEDNESS
Effective as of December 31, 1995, Rentrak contributed to the capital of the
Company approximately $6.5 million, thereby reducing the amount owed by the
Company from $9.3 million to $2.8 million. The $2.8 million of such
indebtedness accrues interest at the rates 9.0% per annum and is due in April
1999. At September 30, 1996, the total outstanding balance of the debt,
including accrued interest, was $2.989 million.
NOTES
In March and April 1996, the Company issued $1.0 million in convertible
subordinated notes to each of Mr. Bill LeVine and to CCC, a Japanese
corporation of which Mr. Muneaki Masuda is President and Chairman (the
"Notes"). Messrs. LeVine and Masuda are Directors of Rentrak and the Company.
These Notes were guaranteed by Rentrak, accrued interest at a rate of 9.0% per
annum, and had a maturity date of August 31, 1997. On August 30, 1996, each of
Mr. LeVine and CCC converted their Notes into 121,789 shares of BlowOut Common
Stock. See "Financing" and "Principal Stockholders".
CCC STOCK PURCHASE
On August 30, 1996, CCC purchased 362,931 shares of BlowOut Common Stock for
$2.98 million in cash in a private placement. See "Financing" and "Principal
Stockholders".
RENTRAK GUARANTEE
On June 26, 1996, the Company entered into an agreement with Rentrak
pursuant to which Rentrak, on the terms and subject to the conditions
contained in such agreement, will guarantee up to $12.0 million in
indebtedness of the Company ("Rentrak Guarantee"). As of the date hereof, the
Rentrak Board has authorized Rentrak to guarantee $7.0 million under the
Rentrak Guarantee. The obligation of Rentrak to issue such guarantee is
subject to a number of conditions such as being current on all monetary
obligations owed to Rentrak and being in compliance with all agreements
between Rentrak and the Company. The Rentrak Guarantee expires on the earlier
of (i) December 31, 1997 or (ii) such time as the total indebtedness of the
Company subject to the Rentrak Guarantee is equal to $12.0 million. Under the
Rentrak Guarantee, the Company must maintain $12.0 million of key man
insurance on Steve Berns. Rentrak may terminate its obligation to issue new
guarantees on 30-days' prior written notice to the Company. The Company can
also terminate such agreement on 30 days' prior written notice, provided that
the Company provides evidence that all indebtedness subject to the Rentrak
Guarantee has been paid off and the Company obtains an unconditional release
of Rentrak. The Company has also agreed that (i) during the term of the
agreement, as long as any Rentrak Guarantee is outstanding and for 24 months
thereafter, the Company will not convey any of its stores to a third party
unless such third party agrees to assume and be bound by the PPT Agreement and
the License Agreement, and (ii) during the term of the agreement or as long as
any Rentrak Guarantee is outstanding, the Company will pay all amounts
received from a sale or closure of a store either to: (a) finance new Company
stores or (b) to pay down indebtedness subject to the Rentrak Guarantee.
During the term of the Agreement, and/or as long as any Rentrak Guarantee is
outstanding, the Company shall pay Rentrak a weekly fee at a rate equal to
.02% per week of then-currently outstanding indebtedness subject to a Rentrak
Guarantee.
Rentrak has agreed to guarantee amounts outstanding under the Phoenix
Facility and the CBC Line of Credit up to an aggregate of $7.0 million. After
the Distribution, Rentrak will have a continuing monetary guaranty for amounts
outstanding under the Phoenix Facility. After the Distribution, Rentrak has
agreed, under certain circumstances in the event of a default under the credit
facility with CBC, to repurchase BlowOut's video cassette inventory in an
amount not to exceed the lesser of the amount owed under the CBC facility or
$5.0 million. Rentrak is also guaranteeing certain trade payables of the
Company and amounts owed under promissory notes to certain of the Company's
suppliers. At September 30, 1996, the total amount of obligations of the
Company subject to the Rentrak Guarantee was approximately $3.5 million.
24
<PAGE>
POLICIES AND PROCEDURES FOR ADDRESSING CONFLICTS
The on-going relationships between the Company and Rentrak may present
certain conflict situations for Mr. Bill LeVine and Mr. Muneaki Masuda, each
of whom serves as a director of the Company and of Rentrak and for Mr. F. Kim
Cox, who serves as a director of the Company and as the Executive Vice
President and Chief Financial Officer of Rentrak. Mr. Cox, as well as other
executive officers and directors of Rentrak and the Company also own (or have
options or other rights to acquire) shares of common stock in Rentrak.
Following the Distribution, Mr. Cox intends to resign upon the selection of a
relacement by the other members of the Company Board. Rentrak and the Company
will adopt, prior to the Distribution, appropriate policies and procedures to
be followed by the Board of Directors of each company to limit the involvement
of Messrs. Cox, LeVine and Masuda in conflict situations, including matters
relating to contractual relationships or litigation between the Company and
Rentrak. Such procedures include requiring Messrs. Cox, LeVine and Masuda to
abstain from voting as directors of each company with respect to matters that
present a significant conflict of interest between the companies. Whether or
not a significant conflict of interest situation exists will be determined on
a case-by-case basis depending on factors as the dollar value of the matter,
the degree of personal interest of Messrs. Cox, LeVine and Masuda in the
matter and the likelihood that resolution of the matter has significant
strategic, operational or financial implications for the business of the
Company and Rentrak.
FINANCING
The following summaries set forth the material terms of the agreements and
transactions described therein.
PHOENIX CREDIT FACILITY
By agreement dated as of July 23, 1996, Phoenix agreed to provide to the
Company a credit facility (the "Phoenix Facility") in an aggregate principal
amount of $2.0 million for a five-year term. Amounts outstanding under the
Phoenix Facility will bear interest at a fixed rate per annum equal to 13.98%.
The proceeds of the Phoenix Facility are to be used to construct and open
(including acquisition of inventory) new Company stores in Wal-Mart Stores and
Wal-Mart SuperCenters. The Phoenix Facility is secured by (i) a continuing
guaranty of Rentrak (which Phoenix, in its sole discretion, may release once
at least 36 payments of amounts outstanding under the Phoenix Facility have
been made or the Company's financial condition is, in Phoenix's sole opinion,
sufficient to justify such release), and (ii) the Company's grant of a first
continuing security interest in all assets at each location to be financed
with funds from the Phoenix Facility. Under the Phoenix Facility, the Company
cannot borrow more than $100,000 per store location, with a minimum draw of
$30,000 per store location. The Phoenix Facility does not contain covenants
restricting payment of dividends or expenditures by the Company or otherwise
limit the Company's activities. See "Related Party Transactions--Rentrak
Guarantee."
CBC FACILITY
In August 1996, CBC agreed to provide to the Company a revolving line of
credit (the "CBC Line of Credit") in the maximum principal amount at one time
outstanding of $5.0 million. Under the CBC Line of Credit, the Company may
only draw up to 80% of the Orderly Liquidation Value (as defined by the CBC
Line of Credit) of eligible new and used video cassette inventory. Advances
under the CBC Line of Credit will bear interest at a floating rate per annum
equal to the Bank of America Reference Rate plus 2.75% (11% as of September
30, 1996). The term of the CBC Line of Credit is three years. The CBC Line of
Credit will be guaranteed by Rentrak until the Company is "spun-off" to the
shareholders of Rentrak and the shares of BlowOut Common Stock are publicly
traded (i.e., the completion of the Distribution); thereafter, Rentrak has
agreed, under certain circumstances in the event of default under the CBC Line
of Credit, to repurchase BlowOut's video cassette inventory at specified
amounts. Under the CBC Line of Credit, the Company may not, without the prior
written consent of CBC, take certain actions, including, the sale or transfer
any collateral except
25
<PAGE>
in the ordinary course of business, the repurchase of stock of the Company,
the payment of declaration of dividends other than stock dividends, and the
dissolution of the Company. The Company has also covenanted to maintain a
minimum tangible net worth of $8,000,000. See "Related Party Transactions--
Rentrak Guarantee."
COMMON STOCK TRANSACTIONS
On August 30, 1996, each of Mr. Bill LeVine and CCC converted individually
held $1.0 million principal amount Notes made by the Company into 121,789
shares (or $8.21 per share) of BlowOut Common Stock. Mr. LeVine and Mr.
Muneaki Masuda, Chairman, President and principal stockholder of CCC, are
directors of the Company and of Rentrak. The price per share was arrived at
through the Company's negotiations in March 1996 with Mr. LeVine and CCC, and
agreed upon by those parties in March and April 1996. The converted Notes were
originally issued in March and April 1996 to evidence sums advanced to the
Company by Mr. LeVine and CCC, accrued interest at the rate of 9% per annum,
were convertible into shares of BlowOut Common Stock, and had a maturity date
of August 31, 1997. The shares of BlowOut Common Stock issued to Mr. LeVine
and CCC are not registered and are subject to usual and customary restrictions
on transferability.
Payment under the Notes at the Maturity Date was guaranteed by Rentrak, with
any payment under the guaranty subject to a 20% premium. At its option,
Rentrak had the right to repay the Notes in cash or, subject to certain
conditions, in shares of Rentrak Common Stock or in a combination of cash and
shares of Rentrak Common Stock. In connection with the conversion of the Notes
into shares of BlowOut Common Stock, the Note holders released Rentrak of its
obligations under this guaranty. Similarly, the Company has been released of
its undertaking to issue warrants to purchase BlowOut Common Stock to the Note
holders under specified circumstances that did not occur.
On August 30, 1996, CCC purchased from the Company for $2.98 million a total
of 362,931 shares of BlowOut Common Stock at a purchase price of approximately
$8.21 per share. The shares issued to CCC are not registered and are subject
to usual and customary restrictions on transferability, but are subject to
registration rights. See "Financing--Registration Rights."
REGISTRATION RIGHTS
Rentrak, CCC and Bill LeVine have been granted the rights to cause the
Company to register under the Securities Act certain of the shares of BlowOut
Common Stock held by them for sale to the public. The registration rights
extend to all 241,599 shares of BlowOut Common Stock held by Rentrak after the
Distribution, the 484,720 shares of BlowOut Common Stock acquired by CCC in
its recent purchase and upon the conversion of the Note discussed above, and
the 121,789 shares of BlowOut Common Stock acquired by Mr. LeVine upon the
conversion of the Note described above. Each of Rentrak, CCC and Mr. LeVine
has the right to make two demands to cause the Company to register the shares
of BlowOut Common Stock held by them. Rentrak has agreed that it will not make
such a demand within six months after the Distribution Date.
In addition, the Company has granted the E-1 Minority "piggyback"
registration rights, which generally grant the E-1 Minority the right to
request registration of their shares of the Company's common stock in
connection with the filing by the Company of a Registration Statement with
respect to an offering of any equity securities by the Company for its own
account or for the account of any of its equity holders (other than any
registration filed in connection with this spin-off, a registration statement
filed on Form S-4 or S-8 or any other registration statement filed in
connection with the offer or sale to the management of the Company of
securities pursuant to an employee stock or other employee benefit plan
arrangement). All shares of the Company's common stock held by the E-1
Minority (127,879 shares after the Distribution) will be subject to such
"piggyback" registration rights. The Company has agreed to pay all expenses
incident to any such registration.
26
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
September 30, 1996 (i) on a historical basis, and (ii) on an adjusted basis to
reflect the Distribution and the transactions set forth in the notes below.
This table should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Company's
Financial Statements and Notes thereto included elsewhere in this Prospectus.
See "Financing".
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1996
----------------------------
ACTUAL AS ADJUSTED
------------ --------------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C> <C>
INDEBTEDNESS:
Note Payable to Rentrak... $ 2,800 $ 2,800
Other short-term debt and
current portion of long-
term debt................ 3,409 3,409
Long-term debt, less cur-
rent portion............. 1,123 1,123(a)(b)
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 per
share par value; 1,000
shares authorized;
no shares issued and out-
standing................. -- --
Common stock, $.01 per
share par value; 10,000
shares authorized; 2,397
shares issued and out-
standing; 2,433 shares
issued and outstanding as
adjusted................. 24 24(b)(c)
Additional paid-in capi-
tal...................... 21,948 21,948(b)(c)
Accumulated deficit....... (11,237) (11,237)
------------ ------------
Total stockholders' equi-
ty...................... 10,735 10,735
------------ ------------
Total capitalization.... $ 18,067 $ 18,067
============ ============
</TABLE>
- --------
(a) This amount gives effect to the borrowing of $963,000 under the Phoenix
Facility described above under "Financing".
(b) This amount gives effect to the issuances of shares of BlowOut Common Stock
pursuant to the conversion of the Notes and recent equity investment
described above under "Financing".
(c) All share amounts give effect to a 1.01491-for-1 stock dividend effected on
October 9, 1996.
27
<PAGE>
SELECTED HISTORICAL AND PRO FORMA FINANCIAL DATA
IN THOUSANDS, EXCEPT FOR PER SHARE DATA
The financial and operating data set forth herein should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Financial Statements, including the Notes
thereto, and other financial data included elsewhere herein. On October 9,
1996, the Board of Directors of the Company authorized a 1.01491-for-1 stock
split of the Company's Common Stock, effected as a stock dividend. Share and
per share data set forth on this Table give effect to such split.
BLOWOUT ENTERTAINMENT, INC.
<TABLE>
<CAPTION>
AS OF AND FOR
THE NINE MONTHS
ENDED
AS OF AND FOR THE YEAR ENDED DECEMBER 31 (1) SEPTEMBER 30 (3)
--------------------------------------------------------------------------------
(UNAUDITED)
PRO FORMA (2) (UNAUDITED) (UNAUDITED)
1995 1994 1993 1992 1995 1996 1995
--------- --------- -------- -------- -------------------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA
Net Revenues:
Rental................. $ 7,689 $ 1,115 $ 467 $ 0 $ 13,021 $17,386 $ 3,543
Product Sales.......... 3,030 178 69 0 4,706 4,699 827
--------- --------- -------- -------- --------- ------- -------
Total Net Revenue..... 10,719 1,293 536 0 17,727 22,085 4,370
Cost of Sales......... 5,220 563 281 0 9,131 9,774 2,313
--------- --------- -------- -------- --------- ------- -------
Gross Margin........... 5,499 730 255 0 8,596 12,311 2,057
Operating Expenses..... 6,275 852 632 0 11,367 12,661 2,893
Selling and Administra-
tive.................. 3,278 309 329 206 4,726 2,752 967
Other Income (Expense). (398) (251) (105) 0 (388) (899) 60
Interest Expense....... (533) (162) (51) 0 (371) (345) (110)
--------- --------- -------- -------- --------- ------- -------
Net Loss.............. $ (4,985) $ (844) $ (862) $ (206) $ (8,256) $(4,346) $(1,845)
========= ========= ======== ======== ========= ======= =======
Net Loss Per Common
Share.................. $ (3.41) $ (0.93) $ (0.95) $ (0.45) $ (4.52) $ (2.30) $ (1.40)
Weighted Average Shares
Outstanding............ 1,464 913 913 457 1,827 1,893 1,322
BALANCE SHEET DATA
Working Capital (Defi-
cit).................. $ (823) $ (415) $ 97 $ 217 $(2,699)
Total Assets........... 18,536 893 1,201 383 24,059
Long-term Debt......... 3,441 1,375 1,120 0 3,923
Stockholders' Equity... 10,095 (1,038) (194) 319 10,735
(Deficit)
</TABLE>
- --------
(1) The selected data as of and for the years ended December 31, 1993, 1994
and 1995 are derived from the audited financial statements of the Company.
Results for such years are not comparable because of the Company's
acquisitions and store expansions that occurred in 1995. See "Management's
Discussion and Analysis of Financial Condition and Results of Operation"
and "The Company."
(2) The unaudited pro forma statement of operations for the year ended
December 31, 1995 for the Company reflects the Company's acquisitions of
E-1 and the SCE Business as if they had been completed on January 1, 1995.
On a pro forma basis, the acquisitions of E-1 and the SCE Business would
have had a material adverse impact on the Company's financial position for
fiscal year 1995. See "The Company--History of the Company." No pro forma
balance sheet has been presented as such acquisitions are already
reflected in
28
<PAGE>
the balance sheet data as of December 31, 1995 and September 30, 1996. No
pro forma statement of operations data has been presented for the nine-
month period ended September 30, 1996 as such acquisitions were effected
prior to January 1, 1996. See "Unaudited Pro Forma Combined Consolidated
Financial Data".
The Company has considered the need for pro forma adjustments for the
effects of the Distribution as if it occurred on January 1, 1995 and has
concluded that no such adjustments are necessary, except to reflect the
stock dividend. See "Unaudited Pro Forma Combined Consolidated Financial
Data" for additional discussion.
(3) The selected financial data as of and for the nine-month periods ended
September 30, 1995 and September 30, 1996 are derived from financial
statements which have not been audited by independent public accountants,
but which reflect, in the opinion of management, all adjustments, which
include normal recurring adjustments, necessary to present fairly all
information set forth therein. The results of operation for the nine-month
period ended September 30, 1996 are not necessarily indicative of the
results to be expected for the entire fiscal year ending December 31,
1996.
29
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the preceding
"Selected Historical and Pro Forma Financial Data" and the Company's Financial
Statements and the Notes thereto and the other financial data included
elsewhere in this Information Statement. The financial information provided
below has been rounded in order to simplify its presentation. However, the
ratios and percentages provided below are calculated using the detailed
financial information contained in the Financial Statements, the Notes thereto
and the other financial data included elsewhere in this Information Statement.
OVERVIEW
General. The Company operates retail "store within a store" video outlets
located in large discount and grocery chain stores throughout the United
States. The Company was formed in 1992, and opened its first store within a
store in January 1993. At year end 1993 and 1994, respectively, the Company
operated seven stores. During these periods, all of the Company's stores were
located in grocery stores.
During 1995, the Company experienced accelerated growth in retail stores and
revenue, primarily through (i) Rentrak's acquisition on May 26, 1995, of a
controlling interest in E-1, a company whose primary business was the
operation of retail video outlets in Wal-Mart SuperCenters, (ii) Rentrak's
acquisition on August 31, 1995, of certain assets and assumption of certain
liabilities which constituted SCE's retail video business and consisted of
retail video outlets in Wal-Marts, Wal-Mart SuperCenters and Super Kmart
Centers (the "SCE Business") and (iii) new store openings in Wal-Mart
SuperCenters and, to a lesser extent, in Super Kmart Centers and Ralphs. See
"The Company--History of the Company" for a more detailed description of the
foregoing acquisitions and store openings. Because of acquisitions and store
openings, comparisons among the years ended December 31, 1993, 1994 and 1995
are not meaningful. At year end 1995, Rentrak's store within a store retail
video operations consisted of 128 stores located in Wal-Mart and Wal-Mart
SuperCenters, 25 stores located in Super Kmart Centers, and four stores
located in Ralphs grocery stores.
At December 31, 1995, Rentrak's store with a store retail video outlets were
operated through four corporations: the Company, E-1 and two wholly owned
subsidiaries, W-1 and K-1, which operated the SCE Business. In May 1996, all
of these operations were consolidated into the Company. See "The Company--
History of the Company." During the first 9 months of 1996, the Company
continued to expand the number of stores it operates, and as of September 30,
1996, the Company operated 192 retail video stores, including 145 stores
located in Wal-Mart and Wal-Mart SuperCenters, 35 stores located in Super
Kmart Centers and 12 stores located in Ralphs grocery stores.
The Company's revenue consists of rental revenue and product sales. Rental
revenue includes rental of pre-recorded video cassettes, video games and
computer games and programs on CD-ROMS. Product sales are derived from sale of
prerecorded video cassettes and excess rental inventory.
The following table sets forth the number of stores open for at least 12
months and average rental revenue for such stores for each of the fiscal years
ended December 31, 1993 through 1995 and for the nine month periods ended
September 30, 1995 and 1996.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED NINE MONTHS ENDED
DECEMBER 31 SEPTEMBER 30
---------------------- -----------------
1995 1994 1993 1996 1995
-------- -------- ---- -------- --------
<S> <C> <C> <C> <C> <C>
No. of Stores open 12 months........... 3 4 0 112 3
Average rental revenue................. $209,067 $114,640 0 $ 96,666 $156,526
Average product sales.................. $ 58,968 $ 17,505 0 $ 27,265 $ 44,444
Average total revenue.................. $268,035 $132,145 0 $123,931 $202,020
</TABLE>
Average rental and sales revenue decreased from nine months ended September
30, 1995 compared to the nine months ended September 30, 1996 due to two
different elements of BlowOut's business. The three
30
<PAGE>
stores operated during the nine months ended September 30, 1995 are located in
high-end grocery stores located in Southern California and have been under
BlowOut management since inception. Substantially all of the 112 stores
operated during the nine months ended September 30, 1996 are located in
WalMart and Kmart Supercenters in mid-size to smaller communities, the
majority of which were acquired by BlowOut. Accordingly, the Company believes
that the average revenue data for the nine months ended September 30, 1996 is
more indicative of the Company's current and future activities than is the
average revenue data for preceding accounting periods.
The Company acquires video cassettes using two types of supplier
arrangements--purchase and revenue sharing under the PPT System. Video
cassettes purchased for basic stock rental are stated at cost and amortized
over 36 months with a provision for a $6 salvage value. New release video
cassettes purchased for more than $20 per cassette are amortized to a value of
$15 per cassette over the first four months then to a $6 salvage value over
the next 32 months. New release video cassettes purchased for less than $20
per cassette are amortized to $8 per cassette over the first four months, and
to a $6 salvage value over the next 32 months. All cassettes are amortized on
a straightline basis.
Since 1993, the Company has obtained a significant amount of its new release
titles through Rentrak under the PPT System. Under this system, Rentrak
provides to the Company video cassettes released by certain studios. The
Company pays a handling fee ($8 to $10) for each video cassette. During the
revenue sharing period, which does not exceed two years, the studio owns the
video cassette, and the rental revenue is shared by the studio, Rentrak and
the Company on a predetermined basis. The Company may also sell excess copies
of a video title and share the sale proceeds with Rentrak and the studio on a
predetermined basis. At the end of the revenue sharing period for a title, the
Company may purchase remaining copies of that title in the Company's
inventory, generally for less than $5 per video cassette. The handling fee per
video cassette is amortized on a straightline basis over 36 months to a $6
salvage value. The cost of video cassettes purchased at the end of the revenue
sharing period is expensed at the time such cost is incurred. Revenue sharing
payments are expensed when incurred.
As a result of the acquisitions of E-1 and the SCE business, the Company
recorded approximately $5.1 million in intangibles which are being amortized
over 10 to 15 years.
Results of Operations. The following table sets forth for the period
indicated (i) statement of operations data expressed as a percentage of total
revenue, (ii) the percentage change from the prior period in this data and
(iii) the number of stores open at the end of each period.
<TABLE>
<CAPTION>
PERCENTAGE PERCENTAGE
YEAR YEAR YEAR CHANGE IN DOLLAR CHANGE IN DOLLAR
STATEMENT OF OPERATING ENDED ENDED ENDED AMOUNT FROM AMOUNT FROM
DATA: 12/31/95 12/31/94 12/31/93 1994 TO 1995 1993 TO 1994
- ---------------------- -------- -------- -------- ---------------- ----------------
<S> <C> <C> <C> <C> <C>
Rental revenue.......... 71.7% 86.3% 87.2% 589.4% 138.7%
Product Sales........... 28.3 13.7 12.8 1606.2 158.0
------ ------ ------ ------ ------
Total revenue.......... 100.0 100.0 100.0 729.1 141.3
Cost of product sales... 48.7 43.6 52.5 827.2 100.4
Operating expenses...... 58.6 65.9 117.9 636.5 34.9
Selling, general and ad-
ministrative........... 30.6 23.9 61.3 960.8 (6.0)
------ ------ ------ ------ ------
Revenue in excess (less
than) of expenses...... (37.8%) (33.4%) (131.7%) 837.4% (38.9%)
====== ====== ====== ====== ======
Number of stores open at
end of period.......... 157 7 7 -- --
</TABLE>
NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO NINE MONTHS ENDED SEPTEMBER
30, 1995
31
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, (i) statement of
operations data expressed as a percentage of total revenue, (ii) the
percentage change from the prior period in this data and (iii) the number of
stores open at the end of each period.
<TABLE>
<CAPTION>
PERCENTAGE
NINE MONTHS NINE MONTHS CHANGE IN DOLLAR
ENDED ENDED AMOUNT FROM
STATEMENT OF OPERATING DATA 9/30/95 9/30/96 1995 TO 1996
- --------------------------- ----------- ----------- ----------------
<S> <C> <C> <C>
Rental revenue........................ 81.1% 78.7% 390.7%
Product sales......................... 18.9 21.3 468.2
----- ----- -----
Total revenue........................ 100.0 100.0 405.3
Cost of rental revenue and product
sales................................ 52.9 44.3 322.6
Operating expenses.................... 66.2 57.3 337.5
Selling, general and administrative... 22.1 12.5 184.5
----- ----- -----
Loss from operations.................. (41.2)% (14.1)% 72.0%
===== ===== =====
Number of stores open at end of peri-
od................................... 134 192
</TABLE>
REVENUE
Revenue for the first nine months of 1996 increased $17.7 million, or
405.3%, to $22.1 million from $4.4 million for the first nine months of 1995.
The increase resulted from an increase in the number of stores in operations,
from 7 at May 1995, to 50 after the E-1 acquisition at June 30, 1995, to 134
after the SCE acquisition at September 30, 1995 to 192 at September 30, 1996.
OPERATING COSTS AND EXPENSES
Cost of Sales
Cost of sales increased from $2.3 million, or 52.9% of revenue for the first
nine months of 1995, to $9.8 million, or 44.3% of revenue, for the first nine
months of 1996. The increase in gross margin on sales resulted from a decrease
in product acquisition costs and efficiencies created by the combination of
the buying departments of the Company, E-1 and SCE.
Operating Expenses
Operating expenses increased from $2.9 million, or 66.2% of revenue, for the
first nine months of 1995 to $12.7 million, or 57.3% of revenue, for the first
nine months of 1996. The increase resulted primarily from an increase in the
number of stores in operation. Significant components of operating expenses
include compensation, occupancy and fixed asset depreciation.
Compensation and Related Expenses--Compensation and related expenses
increased from $1.7 million, or 38.5% of revenue, for the first nine months of
1995 to $7.2 million or 32.8% of revenue for the first nine months of 1996.
The increase was the result from the continued expansion of BlowOut's business
through the opening of video retail stores. The decrease in compensation and
related expenses as a percentage of revenue was primarily due to the
installation of a labor monitoring program to match workforce hours with
demand and minimize overtime.
Occupancy Expense--Occupancy expense increased from $.5 million, or 10.5% of
revenue, for the first nine months of 1995 to $2.4 million, or 10.8% of
revenue, for the first nine months of 1996. The increase was the result of the
continued expansion of BlowOut's business through the acquisition and opening
of video retail stores. The increase in occupancy expense as a percentage of
revenue was primarily due to the E-1 and SCE stores' lease agreements having
lease payments calculated at a higher percentage of sales than compared to the
original BlowOut retail stores.
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Depreciation--Depreciation increased from $.3 million, or 5.7% of revenue,
for the first nine months of 1995, to $8 million, or 3.5% of revenue, for the
first nine months of 1996. The increase was the result of the E-1 and SCE
acquisitions. The decrease in depreciation as a percentage of revenue was
primarily due to the increase in same store revenue from prior year and due to
the fixtures for the E-1 and SCE stores not costing as much as the original
BlowOut stores.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased from $1.0 million, or
22.1% or revenue, for the first nine months of 1995, to $2.8 million, or 12.5%
of revenue, for the first nine months of 1996. The decrease in selling,
general and administrative expenses as a percentage of revenue was primarily
the result of efficiencies gained by combining the accounting and
administrative departments of the Company, E-1 and SCE.
NONOPERATING EXPENSES, NET
Nonoperating expenses, net increased from $.05 million, or 1.0% of revenue,
for the first nine months of 1995, to $1.2 million, or 5.6% of revenue, for
the first nine months of 1996. The increase in nonoperating expenses resulted
from the Company closing 24 stores between July 1996 and September 1996,
increased interest expenses, and the expensing of costs associated with the
spin-off from Rentrak Corporation.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
The audited consolidated financial statements of the Company included
elsewhere in this Information Statement include the results of operations of
the Company for each of the three years in the period ended December 31, 1995.
The Company opened its first store within a store outlet in January, 1993. For
the year ended December 31, 1993, the Company's results of operations included
the operation of eight retail video outlets, located in grocery stores, which
the Company opened during 1993. For the year ended December 31, 1994, the
Company's results of operations included the operation of the seven retail
video outlets in grocery stores which were open for the entire year. For the
year ended December 31, 1995, the Company's results of operations included (i)
the operations of the Company's retail video outlets in grocery stores, (ii)
the operations of E-1 for the seven-month period ended December 31, 1995 and
(iii) the SCE Business for the four-month period ended December 31, 1995.
Because of acquisitions and store openings, comparisons among the years ended
December 31, 1993, 1994 and 1995 are not meaningful.
Revenue. Revenue for fiscal year 1995 increased $9.4 million, or 729.1%, to
$10.7 from $1.3 million for fiscal year 1994. The increase resulted from an
increase in the number of stores in operation, from four at December 31, 1994
to 157 at December 31, 1995, due to the acquisitions of E-1 and the SCE
Business. The $10.7 million in 1995 revenue included $6.1 million from E-1 and
$3.5 million from the SCE Business.
Cost of Product Sales. Cost of product sales increased from $0.6 million, or
43.6% of revenue, for fiscal 1994 to $5.2 million, or 48.7% of revenue, for
fiscal year 1995. The decrease in gross margin on sales resulted from an
increase in product acquisition costs, and increased emphasis of sales from
sell through products which carry lower margins than rental product. The $5.2
million in fiscal year 1995 cost of sales included $3.1 million from E-1 and
$1.7 million from the SCE Business. As a percentage of revenues, product sales
increased from 13.7% in 1994 to 28.3% in 1995. The increase in product sales
as a percentage of revenues was the result of a deliberate effort by the
Company to satisfy consumer demand for previously viewed sales product. Prior
to the acquisition of E-1 and SCE in 1995, substantially all marketing efforts
were concentrated on video rentals. This shift in revenue mix is not expected
to continue on an annual basis.
Operating Expense. Operating expenses increased from $0.9 million, or 65.9%
of revenue, for fiscal 1994 to $6.3 million, or 58.5% of revenue, for fiscal
year 1995. The increase resulted primarily from the significant increase in
the number of stores in operation. The primary components of operating
expenses include compensation, occupancy and fixed asset depreciation.
Depreciation and amortization increased from
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<PAGE>
$0.2 million, or 14.4% of revenue, for fiscal year 1994, to $0.7 million, or
6.8% of revenue, for fiscal year 1995. The increase was the result of the
acquisitions of E-1 and the SCE Business. Also, beginning in May and September
1995, the goodwill acquired from the acquisitions of E-1 and the SCE Business
began to be amortized.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased from $0.3 million, or 23.9% of revenue, for
fiscal year 1994, to $3.3 million, or 30.6% of revenue, for fiscal year 1995.
The increase in selling, general and administrative expenses as a percentage
of revenue was primarily due to the overlapping functions of the separate
corporate staffs of the Company, E-1, and SCE. The corporate functions were
consolidated in Portland, Oregon by March 31, 1996 with all duplicate
functions eliminated by June 30, 1996.
Net Nonoperating Expenses. Net nonoperating expenses increased from $0.4
million, or 31.9% of revenue, for fiscal year 1994, to $0.9 million, or 8.7%
of revenue, for fiscal year 1995. The increase is primarily attributable to
the loss on closing a number of the video retail stores and increase in
interest expense.
YEAR ENDED DECEMBER 31, 1994 COMPARED TO YEAR ENDED DECEMBER 31, 1993
Revenue. Revenue for fiscal year 1994 increased $0.8 million, or 141.3%, to
$1.3 million from $0.5 million for fiscal 1993. The increase resulted from an
increase in the average number of stores in operation for the full year of
1994 as compared to 1993. The Company opened four stores during the year ended
December 31, 1993 and an additional three stores during the year ended
December 31, 1994. In addition, higher revenue generating stores were opened
in Southern California.
Cost of Product Sales. Cost of product sales increased from $0.3 million, or
52.5% of revenue, for fiscal 1993 to $0.6 million, or 43.6% of revenue, for
fiscal year 1994. The increase in gross margin on sales resulted from improved
inventory controls, a shift in sales to products with higher margins, a
reduction in product acquisition costs and increased rental transactions per
video cassette.
Operating Expenses. Operating expenses increased from $0.6 million, or
117.9% of revenue, for fiscal 1993 to $0.9 million, or 65.9% of revenue, for
fiscal year 1994. The increase resulted primarily from an increase in the
number of stores in operation. Significant components of operating expenses
include compensation, occupancy and fixed asset depreciation. Compensation and
related expense increased from $0.2 million, or 42.1% of revenue, for fiscal
year 1993 to $0.4 million or 34.6% of revenue, for fiscal year 1994. The
increase was the result of the continued expansion of the Company's business
through the opening of video retail stores. The decrease in compensation
related expenses as a percentage of revenue was primarily due to increased
same store revenue. Occupancy expense increased from $0.1 million, or 18.6% of
revenue, for fiscal year 1993 to $0.12 million, or 9.3% of revenue, for fiscal
year 1994. The increase was the result of the continued expansion of the
Company's business through the opening of video retail stores. The decrease in
occupancy expense as a percentage of revenue was primarily due to increased
average store revenue. Depreciation and amortization increased from $0.1
million, or 21.1% of revenue, for fiscal year 1993, to $0.2 million, or 14.4%
of revenue, for fiscal year 1994. The increase was the result of the Company's
continued investment in capital additions, particularly capital equipment for
new store openings.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased from $0.33 million, or 61.3% of revenue, for
fiscal year 1993, to $0.31 million, or 23.9% of revenue, for fiscal year 1994.
The decrease in selling, general and administrative expenses as a percentage
of revenue was primarily the result of economies of scale with the continued
expansion of the Company's business through the opening of video retail
stores.
Net Nonoperating Expenses. Net nonoperating expenses increased from $0.2
million, or 29.2% of revenue, for fiscal year 1993, to $0.4 million, or 31.9%
of revenue, for fiscal year 1994. The increase is primarily attributable to
the loss on closing a number of the video retail stores and an increase in
interest expense.
34
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal capital needs are for the opening of new stores. To
date, the Company has funded its operations primarily through cash from
operations, advances from Rentrak, the Notes from Mr. LeVine and CCC and trade
credit from suppliers.
For the nine months ended September 30, 1996, net cash used in investment
activities was $8.1 million, consisting primarily of a $6.0 million investment
in retail inventory and a $2.1 million investment in capital expenditures.
During that period, cash provided by operations was $1.1 million and the
Company received $1.1 million of advances from Rentrak, $2.0 million upon
issuance of the Notes, and $2.98 million upon issuance of the BlowOut Common
Stock. The $1.1 million advance from Rentrak was repaid in October 1996. In
August, 1996, the Notes were converted into shares of BlowOut Common Stock
representing 10% of the issued and outstanding shares of BlowOut Common Stock.
In August 1996, Phoenix agreed to provide the Phoenix Facility in an
aggregate principal amount of $2.0 million for a five-year term. Amounts
outstanding under the Phoenix Facility will bear interest at a fixed rate per
annum equal to 13.98%. The proceeds of the Phoenix Facility are to be used to
construct and open (including acquisition of inventory) new Company stores in
Wal-Mart Stores and Wal-Mart SuperCenters. The Phoenix Facility is secured by
(i) a continuing guaranty of Rentrak (which Phoenix, in its sole discretion,
may release once at least 36 payments of amounts outstanding under the Phoenix
Facility have been made or the Company's financial condition is, in Phoenix's
sole opinion, sufficient to justify such release), and (ii) the Company's
grant of a first continuing security interest in all assets at each location
to be financed with funds from the Phoenix Facility. Under the Phoenix
Facility, the Company cannot borrow more than $100,000 per store location,
with a minimum draw of $30,000 per store location. As of September 30, 1996,
the Company had borrowed approximately $962,700 under the Phoenix Facility.
See Notes, "Nature of Business, Formation of Company and Significant
Accounting Policies--Operations and Subsequent Financing", to Notes to
"Consolidated Financial Statements."
On September 12, 1996, CBC entered into an agreement with the Company to
provide the CBC Line of Credit which provides for a revolving line of credit
("CBC Line of Credit") in the maximum principal amount at one time outstanding
of $5.0 million. Under the CBC Line of Credit, the Company may only draw up to
80% of the Orderly Liquidation Value (as defined by the CBC Line of Credit) of
eligible new and used video cassette inventory. As of September 30, 1996, 80%
of the Orderly Liquidation Value of the Company's inventory was approximately
$4.25 million. Advances under the CBC Line of Credit will bear interest at a
floating rate per annum equal to the Bank of America Reference Rate plus 2.75%
(11% as of September 30, 1996). The term of the CBC Line of Credit is three
years. The CBC Line of Credit will be guaranteed by Rentrak until the Company
is "spun-off" to the shareholders of Rentrak and the shares of BlowOut Common
Stock are publicly traded (i.e., the completion of the Distribution);
thereafter, Rentrak has agreed, under certain circumstances in the event of a
Default under the CBC Line of Credit, to repurchase BlowOut's video cassette
inventory at specified amounts. See "Related Party Transactions--Rentrak
Guarantee." As of September 30, 1996, the Company had borrowed approximately
$2.5 million under the CBC Line of Credit. See Notes, "Nature of Business,
Formation of Company and Significant Accounting Policies--Operations and
Subsequent Financing", to the Notes to "Consolidated Financial Statements."
On July 22, 1996, the Company entered into an agreement with Star Video to
provide the Company with video cassettes for rental and sale and with video
games for sale ("Star Video Agreement"). Star Video paid off the balance of a
promissory note in the amount of $240,974.75 made by the Company to its
previous supplier. As a result, the Company executed a new promissory note to
Star Video, pursuant to which the Company is obligated to pay Star Video
$120,487.37 on each of May 27, 1997 and 1998. Under the Star Video Agreement,
Star Video became the Company's exclusive supplier of new video cassettes for
rental and sale not purchased from Rentrak until the later of (i) July 21,
1997, or (ii) repayment of such promissory note. This promissory note is
secured by a guaranty of Rentrak. In addition, to secure all amounts owed
under the Star Video Agreement, the Company has granted to Star Video a first
priority security interest in all of the Company's existing inventory, which
security interest Star Video will release, in exchange for a subordinated
security interest on such inventory
35
<PAGE>
upon (i) consummation of any secured financing (see "Financing"), and (ii) the
Company being current in its payments to Star Video under the Star Video
Agreement at such time.
On August 30, 1996, CCC purchased from the Company for $2.98 million a total
of 362,931 shares of BlowOut Common Stock at a purchase price of approximately
$8.21 per share. See Notes, "Nature of Business, Formation of Company and
Significant Accounting Policies--Operations and Subsequent Financing", to
Notes to "Consolidated Financial Statements."
During the first nine months of 1996, the Company opened 59 stores,
primarily in Wal-Mart SuperCenters. The Company expects to open an additional
eight stores during the remainder of 1996. The Company intends to open three
new stores in Super Kmart Centers during the fourth quarter of fiscal year
1996. The Company does not know the number of new Wal-Mart SuperCenter, Super
Kmart Center or Ralphs grocery store locations which will be available to the
Company for the opening of video outlets in 1997. Based solely upon
discussions with Wal-Mart, management currently believes that it will have the
opportunity to open at least 17 new outlets in Wal-Mart SuperCenters in 1997,
although there can be no assurance as to the number of locations that Wal-Mart
will make available to the Company. The Company is aware of one other
retailer, Blockbuster, which operates store within a store video outlets in
Wal-Mart stores. The Company currently does not believe that it will be
opening a significant number of stores in Super Kmart Centers or Ralphs in
1997.
Also, during the first nine months of 1996, the Company closed 24 stores
which did not meet certain performance levels (consisting of 23 stores in Wal-
Mart and 1 store in Kmart). In October 1996, the Company closed three stores
which did not meet certain performance levels in Kmart. The Company has
notified Kmart of its intention to close 10 additional underperforming stores
by April 1997.
As a result of the equity investment by CCC, cash from operations and
borrowings as of September 30, 1996, the Company had cash and cash equivalents
of $4.0 million. The Company expects to meet its short-term liquidity
requirements through net cash provided by operations, cash on hand and
advances under the Phoenix Facility and CBC Line of Credit. Management
believes that these sources of cash, as well as additional availability under
the Phoenix Facility and CBC Line of Credit, will be sufficient to meet its
operating needs for at least the next 12 months. See "Risk Factors--Expansion
Strategy." There can be no assurance that funds will be available in
sufficient amounts to finance the acquisition or opening of enough video
outlets to sustain the Company's recent rates of growth or that funds will be
available to satisfy the Company's liquidity needs beyond the next 12 months.
At September 30, 1996, the Company had a working capital deficit of $2.7
million. Video cassette rental inventories are treated as noncurrent assets
under generally accepted accounting principles because they are not assets
which are reasonably expected to be completely realized in cash or sold in the
normal business cycle. Although the rental of this inventory generates a
substantial portion of the Company's revenue, the classification of these
assets as noncurrent excludes them from the computation of working capital.
The acquisition cost of video cassette rental inventories, however, is
reported as a current liability until paid and, accordingly, included in the
computation of working capital. Consequently, the Company believes working
capital is not as significant a measure of financial condition for companies
in the video retail industry as it is for companies in other industries
because of the accounting treatment of video cassette rental inventory as a
noncurrent asset. The Company expects to operate with a working capital
deficit as it expands its store base.
IMPACT OF NEW ACCOUNTING STANDARDS
During March 1995, the Financial Accounting Standards Board issued Statement
No. 121 (SFAS 121), "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed of," which requires the Company to review
for impairment of long-lived assets, certain identifiable intangibles, and
goodwill related to those assets whenever events or changes in circumstances
indicate that the carrying amount of an asset might not be recoverable. In
certain situations, an impairment loss would be recognized. SFAS 121 will
become effective for the Company's year ending December 31, 1996. The Company
has studied the implications of SFAS 121 and, based on its initial evaluation,
does not expect it to have a material impact on the Company's financial
condition or results of operations.
36
<PAGE>
During October 1995, the Financial Accounting Standards Board issued
Statement No. 123 (SFAS 123), "Accounting for Stock-Based Compensation," which
establishes a fair value-based method of accounting for stock-based
compensation plans and requires additional disclosures for those companies
that elect not to adopt the new method of accounting. The Company will
continue to account for employee purchase rights and stock options under APB
Opinion No. 25, "Accounting for Stock Issued to Employees." SFAS 123
disclosures will be effective for fiscal years beginning after December 31,
1995.
THE COMPANY
GENERAL
The Company is engaged in the business of operating "store within a store"
retail video outlets which rent and sell video cassettes, video games,
computer games and programs on CD-ROMs in Wal-Mart and Wal-Mart SuperCenters,
Super Kmart Centers, and Ralphs pursuant to master leases with each retailer.
As of September 30, 1996, the Company operated 145 stores in Wal-Mart and Wal-
Mart SuperCenters, 35 stores in Super Kmart Centers, and six stores in Ralphs
under the name "BlowOut Video" pursuant to a license with Rentrak, and six
additional stores in Ralphs under the name "Videos & More."
HISTORY OF THE COMPANY
Formation of the Company. The Company was incorporated in July 1992 as SMM,
Inc., a Delaware corporation, and shortly thereafter changed its name to SVI.
Acquisition of SCE. On August 31, 1995, Rentrak formed W-1 and K-1. On the
same date, through W-1 and K-1, Rentrak acquired the Wal-Mart and Kmart "store
within a store" retail video operations from SCE (the "SCE Business"). In
consideration for such acquisition, Rentrak issued to SCE 878,000 shares of
Rentrak Common Stock with an aggregate value of approximately $5.2 million
(based upon a market price of Rentrak Common Stock of $5.94 per share on the
date of issuance). As part of the acquisition, the leases pursuant to which
SCE operated its retail video outlets in Wal-Mart and Kmart stores were
assigned to W-1 and K-1, respectively. Effective September 1, 1995, Rentrak
assigned to W- 1, as a capital contribution, all of the former SCE assets and
liabilities related to the operations of its Wal-Mart stores, and Rentrak
assigned to K-1, as a capital contribution, all of the former SCE assets and
liabilities related to the operation of its Kmart stores. In addition, on
February 13, 1996, K-1 acquired certain assets of nine video retail "store
within a store" outlets located in Super Kmart Centers from Record Town, Inc.
for a total purchase price of $135,000.
Consolidation of SVI, W-1 and K-1. In May 1996, Rentrak consolidated the
businesses and operations of the Company, W-1 and K-1. To effect
consolidation, Rentrak contributed all of the outstanding capital stock of W-1
and K-1 to SVI as a capital contribution. Following this contribution, SVI
amended its Certificate of Incorporation to (i) change its name to BlowOut
Entertainment, Inc., (ii) effect a reverse stock split of its outstanding
capital stock, and (iii) increase the authorized capital stock to 11,000,000
shares, of which 10,000,000 shares were authorized for issuance as common
stock and 1,000,000 shares were authorized for issuance as preferred stock. W-
1 was merged into the Company in June 1996.
Acquisition of E-1. Between July 1994 and December 1995, Rentrak and two of
its wholly-owned subsidiaries acquired 92.6% of the issued and outstanding
common stock of E-1, with the remaining 7.4% of E-1's common stock being held
by individuals unrelated to Rentrak and entities controlled by such
individuals (collectively, the "E-1 Minority"). E-1 operated "store within a
store" video outlets in Wal-Marts and Wal-Mart SuperCenters and was also
engaged in the same line of business as SVI, W-1 and K-1.
In May 1996, the Company acquired all of E-1's tangible and intangible
assets and assumed all of its liabilities in exchange for shares of BlowOut
Common Stock. Following such sale of assets, E-1 dissolved and liquidated its
assets pursuant to a Plan of Liquidation that provided for the distribution of
the shares of BlowOut Common Stock to Rentrak and the E-1 Minority on a basis
such that, as a result, Rentrak and the E-1 Minority, as a group, owned 93%
and 7% of the then-issued and outstanding BlowOut Common Stock.
37
<PAGE>
BUSINESS
THE VIDEO RETAIL INDUSTRY
According to the Video Investor newsletter published by Paul Kagan
Associates, Inc., video retail industry revenues are believed by the Company
to have been approximately $14.8 billion in 1995, with industry revenues
projected to grow to $20.5 billion by 2005. Of the total video retail industry
revenues in 1995, video rental revenues were approximately $7.5 billion and
video sales revenues were approximately $7.3 billion.
The industry is characterized by a high degree of fragmentation, with only
five chains in 1995 operating in excess of 100 video specialty stores and the
average chain operating fewer than 50 stores. The Company believes that in
recent years the video retail industry has begun to consolidate as regional
chains and smaller video specialty store operations are acquired by operators
with greater access to capital.
The Company believes that the home video market has become the single
largest source of revenues for motion picture distributors, providing
approximately 53% of total revenues in 1995. Due to the high production cost
of films today, the Company believes that without home video revenues, most
films would be unprofitable. Furthermore, in order to quickly recoup the large
theatrical marketing budgets that often exceed the film's production cost,
most films are released simultaneously in a large number of theaters. This
broad exposure usually results in most theaters only playing the film for a
few weeks before replacing it with another release.
Movie studios seek to maximize their revenues in sequential release date
windows to various movie distribution channels. These distribution channels
currently include in release date order first and second tier movie theaters,
video specialty stores, Pay-Per-View, pay television, basic cable television,
and network and syndicated television. The Company believes that this method
of sequential release has allowed movie studios to increase their total
revenues with relatively little adverse effect on the revenue derived from
previously established channels and that movie studios will continue the
practice of sequential release as new distribution channels become available.
In the Company's experience, the movie studios typically set the initial
wholesale price of prerecorded videos at between $60 and $75, which encourages
rental rather than sale. To maximize revenues to the studios, after
approximately six to twelve months the studios will often lower the selling
price of these same videos to between $10 and $20. In addition, a relatively
small number of titles that are believed to have broader consumer appeal, such
as Pocahontas, Mission Impossible and Twister, are wholesaled initially by the
studios at between $12 and $17 to encourage their purchase rather than rental.
While much of this type of product is heavily promoted as "sell-through"
titles by all types of mass market retailers, the video specialty stores offer
this product both for sale and rental and thus also attract the customer who
prefers to rent rather than buy despite a title's relatively low purchase
price.
Video specialty stores typically purchase a majority of the films that were
released in theaters regardless of their success in attracting viewers. The
Company believes that many of its customers are predisposed to view a specific
film as a result of its marketing campaign, but due to its short playing time
at a local theater, they will often rent or purchase the prerecorded home
video version of that film. In addition, the Company believes consumers are
more apt to view films that were not box office hits on rented videos than on
any other medium because video specialty stores provide the opportunity to
browse and make an impulse choice among a very broad selection of film titles
at a low price. Therefore, video specialty stores represent a reliable revenue
source for a majority of the film output of the major movie studios.
The Company believes that the major studios will begin to release their
films on a new digital video disc ("DVD") format within the next 12 to 18
months. To the extent that this format becomes popular with consumers, the
video retail industry is likely to also carry film titles in this format for
both rental and sale. Although new technologies have historically led to the
creation of new distribution channels, it is likely that films will be
released on DVD and video cassettes simultaneously. As movies in this format
are expected to offer
38
<PAGE>
superior image and sound quality to that of video cassettes, the rental and
purchase of home videos should become even more attractive to consumers than
at present.
BUSINESS STRATEGY
The Company's current business strategy is based on three key advantages
management believes the Company enjoys: (i) its position in the retail video
rental industry with its "store within a store" concept; (ii) its ability to
"piggyback" on what management believes will be the continued success of Wal-
Mart SuperCenters, Super Kmart Centers and Ralphs; and (iii) its existing
relationship with each of Wal-Mart, Kmart and Ralphs. In addition, it is the
Company's strategy to seek to open video retail outlets in other mass retail
and grocery stores. To capitalize on these points, the Company has taken or
intends to take the following steps: (a) increase the number of video
cassettes each store sells; (b) increase the video cassette inventory of new
releases that each store carries; (c) change the mix of inventory of each
store to increase the number of video games and family and children's movies
available; (d) continue to utilize market research to improve the inventory
mix of video cassettes, CD-ROM programs and games; (e) endeavor to hold down
marketing costs by using common advertising for all locations; (f) use its
centralized computer system to track overnight reporting of results from
individual stores; and (g) use a common store design to reduce construction
costs.
The Company opened 59 new stores during the nine-month period ended
September 30, 1996. It currently intends to open a total of eight additional
stores in Wal-Mart during the fourth quarter of calendar year 1996. The
Company currently anticipates opening 17 additional stores in 1997, all of
which have been identified by Wal-Mart. The Company closed three stores in
Super Kmart Centers in October, 1996 and intends to open three new stores in
Super Kmart Centers during the fourth quarter of fiscal year 1996. The Company
currently does not believe that it will be opening a significant number of
stores in Super Kmart Centers or Ralphs in 1997. However, to achieve its
expansion goal, the Company will be required to use substantially all of the
debt and equity capital described under the caption "Financing" above. Failure
to have available a substantial portion of capital will materially adversely
affect the Company's ability to implement its business strategy and expansion
plan.
SUPERCENTERS
Wal-Mart SuperCenters and Super Kmart Centers are large stores that feature
a full line of general merchandise and groceries as well as a variety of
ancillary services provided by independent third parties including video
rentals, dry cleaning, hair care, optical and floral shops, all intended to
provide customers with "one stop" shopping.
Wal-Mart. According to Wal-Mart, Wal-Mart SuperCenters average 181,000
square feet in size. Wal-Mart opened its first SuperCenter in 1988. Wal-Mart
was operating 143 SuperCenters in 19 states by January 31, 1995 and 239
SuperCenters by January 31, 1996. The majority of the SuperCenters are located
in Texas, Tennessee, Georgia and Missouri, and the Company expects Wal-Mart to
continue to concentrate store openings in small towns in the southeastern,
southwestern, and midwestern United States. The Company believes that it and
Blockbuster Entertainment, Inc. are currently the only two providers of "store
within a store" retail video outlets to Wal-Mart.
Kmart. According to Kmart, Super Kmart Centers range in size from 135,000 to
185,000 square feet. Kmart opened its first SuperCenter in 1991. Kmart was
operating 67 Super Kmart Centers at January 25, 1995 and 87 such stores at
January 31, 1996. The Company believes that it is currently the sole provider
of "store within a store" retail video outlets to Kmart, although it believes
that Kmart's strategy is to have more than one such provider.
Ralphs. Ralphs operates approximately 300 supermarkets, principally on the
west coast of the U.S. Through an agreement with Ralphs entered into on May 1,
1995, the Company is the exclusive operator of "store within a store" retail
video outlets for Ralphs.
STORES
At September 30, 1996, the Company operated a total of 192 stores,
consisting of 145 stores in Wal-Mart and Wal-Mart SuperCenters, 35 Stores in
Super Kmart Centers and six stores in Ralphs under the name
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<PAGE>
"BlowOut Video" and six additional stores in Ralphs under the name "Videos &
More." BlowOut Video stores in Wal-Mart stores and Wal-Mart SuperCenters range
from 840 square feet to approximately 1,300 square feet in size. Stores within
Super Kmart Centers average approximately 1,000 square feet in size. Locations
within Ralphs occupy between 800 and 2,800 square feet. In all locations,
stores do not have separate outside entryways, but open within the store in
which they are located. The majority of the Company's stores have "drop boxes"
located outside the building so that customers may return video cassettes
without having to come into the store.
The following table sets forth the store development activities of the
Company during the periods indicated:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED YEAR ENDED YEAR ENDED
9/30/96 12/31/95 12/31/94
----------- ---------- ----------
<S> <C> <C> <C>
Stores open beginning...................... 157 7 7
of period
Stores opened or........................... 59 154 0
acquired in period
Stores closed in period.................... 24 4 0
Stores open at end of...................... 192 157 7
period
</TABLE>
Wal-Mart, Kmart, and Ralphs each typically provides, at its expense, semi-
finished space, including walls, HVAC, utilities and paint, for BlowOut Video
Stores. The Company then completes such stores, including installment of
carpeting, computers and other fixtures, at the Company's expense. BlowOut
Video stores use a common store design to control the Company's construction
costs. The Company contracts with third parties to build out BlowOut Video
Stores across the United States. The cost to the Company to construct and open
a typical BlowOut Video store, including inventory, fixtures (including any
outside drop boxes at Wal-Mart SuperCenters, Super Kmart Centers and Ralphs),
and computers averages approximately $100,000.
OPERATIONS
General operations of the Company's business are administered by the Vice
President of Operations with the assistance of an Assistant Director of
Operations. The Vice President of Operations reports directly to the
President.
Individual BlowOut Video stores are organized into districts consisting of
16 locations and each district is, in turn, organized into areas of four
locations. One store manager in each area is appointed as Area Manager to
oversee his or her store and the other three stores in the area. One Area
Manager in the district is selected by the Company to serve as the District
Manager.
While the typical Wal-Mart SuperCenter and Super Kmart Center operates 24
hours per day every day of the year except Christmas Day, BlowOut Video stores
are typically open from 9:00 a.m. to 11:00 p.m., with a total of 135 "employee
hours" required on all but a few of the busiest weeks of the year.
All stores use a Ketec anti-theft security system, with all merchandise
inventories labeled to deter pilferage. Stores record rental and sale
transactions on a personal computer which uses an off-the-shelf point-of- sale
video inventory management system. Each store has a telephone modem which is
programmed to down load rental and sales information daily to the Company
headquarters, where the data is processed to provide inventory tracking,
employee performance, and financial statements to management.
Each BlowOut Video store has in inventory an average of 3,500 cassettes for
rental at any given time. Rental rates are based upon a tiered system: (i)
"new releases" are rented at rates ranging from $2.50 to $3.00 for two days,
(ii) "catalogue" items are rented at a rate of $1.50 for five days, and (iii)
"children's" videos are rented at rates ranging from $0.98 to $1.50 for five
days, subject to adjustment for local conditions. After 60 days, some of the
cassettes may be made available for sale as "previously viewed" at prices
ranging from
40
<PAGE>
$3.88 to $14.95. The Company promotes sales by advertising, principally
through local newspapers and promotional techniques such as selecting one to
three of the most popular titles each month and guaranteeing the availability
of such titles or the customer's ability to rent any other video in stock for
free.
SUPPLIERS
Orders for merchandise are placed to Star Video Entertainment L.P. ("Star
Video"), for traditional rental and new sale video cassettes, and Rentrak for
PPT rental cassettes, games, and CD/ROM. Used cassettes are purchased from a
number of vendors. The Company believes it could replace any of these
suppliers, except Rentrak, with suppliers whose pricing and availability would
be comparable. The Company directs virtually all of its suppliers of
merchandise, supplies, and fixtures to deliver the material directly to each
of its retail locations. In the past and currently the Company has purchased
video cassettes from various suppliers other than Rentrak including Ingram,
Funatics and Movies 4 Sale. The Company does not have any long term contracts
with any video cassette suppliers other than Rentrak and Star Video.
On July 22, 1996, the Company entered into the Star Video Agreement with
Star Video to provide the Company with video cassettes for rental and sale and
with video games for sale. Star Video paid off the balance of a promissory
note in the amount of $240,974.75 made by the Company to its previous
supplier. As a result, the Company executed a new promissory note to Star
Video, pursuant to which the Company is obligated to pay Star Video
$120,487.37 on each of May 27, 1997 and 1998. Under the Star Video Agreement,
Star Video became the Company's exclusive supplier of new video cassettes for
rental and sale not purchased from Rentrak until the later of (i) July 21,
1997, or (ii) repayment of such promissory note. This promissory note is
secured by a guaranty of Rentrak. In addition, to secure all amounts owed
under the Star Video Agreement, the Company has granted to Star Video a first
priority security interest in all of the Company's existing inventory, which
security interest Star Video will release, in exchange for a subordinated
security interest on such inventory upon (i) consummation of any secured
financing (see "Financing"), and (ii) the Company being current in its
payments to Star Video under the Star Video Agreement at such time.
Under the PPT System, the Company leases video cassettes from Rentrak under
a revenue sharing arrangement. Pursuant to this arrangement, the Company pays
a fixed "handling fee" for each cassette leased from Rentrak and a
"transaction fee" each time a cassette is rented. See "Certain Transactions
and Relationship Between the Company and Rentrak after the Distribution."
For the quarter ended September 30, 1996 BlowOut had three video cassette
distributors who supplied 41.0%, 27.3% and 12.2% of total tape purchases. For
the nine months ended September 30, 1996, BlowOut had three video cassette
distributors who supplied 39.7%, 29.2% and 11.8% of total tape purchases. No
other distributors provided more than 10% of the total tape purchases for
either the three months or nine months ended September 30, 1996.
For the quarter ended September 30, 1995, BlowOut had three video cassette
distributors who supplied 28.7%, 24.3% and 22.1% of total tape purchases. For
the nine months ended September 30, 1995, BlowOut had three video cassette
distributors who supplied 26.8%, 24.4% and 23.8% of total tape purchases. No
other distributors provided more than 10% of the total tape purchases for
either the three months or nine months ended September 30, 1995.
STORE LEASES
Wal-Mart. In January 1993, the Company entered into a non-exclusive master
lease with Wal-Mart, which was amended on May 15, 1995 and May 14, 1996 (as
amended, the "Wal-Mart Master Lease"), under which the Company, as it opens
each store, executes a standard lease with Wal-Mart. Each such lease is for a
five-year period, with one option to renew for an additional five-year period.
Rent is calculated as a percentage of revenues generated by the store. The
Company is also liable for its pro rata share of real estate taxes. If the
volume of gross sales from a given store that has been opened at least 12
months is less than a predetermined amount in any consecutive 12-month period,
either the Company or Wal-Mart, on 60 days' written notice to the other, may
41
<PAGE>
terminate the standard lease with respect to the store. Since January 1, 1996,
the Company has exercised its option to close 23 stores in Wal-Mart Stores for
failure to achieve minimum sales volume. No stores have been closed at the
election of Wal-Mart.
Kmart. Effective September 21, 1994, the Company entered into a non-
exclusive master sublease agreement with Kmart, which was amended on April 1,
1995 and January 21, 1996 (as amended, the "Kmart Master Lease"), under which
the Company, as it opens each store, executes a rider for a specified term
with Kmart. The Kmart Master Lease has a term of five years, with one option
to renew for an additional five-year term. The Company pays an annual minimum
rent of $3.75 per square foot, and additional rent calculated as a percentage
of gross revenues. If the volume of annual gross revenues from a given store
that has been open at least 12 months is less than certain predetermined
amounts, either the Company or K-Mart, on written notice to the other within
180 days following the anniversary date of that store's rider, terminate the
lease with respect to that store. The Company has not opened any new stores
under the Kmart Master Lease in fiscal 1996. Since January 1, 1996, the
Company has exercised its option to close one store in Kmart for failure to
achieve minimum sales volume, and has given Kmart notice of its intention to
close 10 additional underperforming stores in April 1997. No stores have been
closed at the election of Kmart.
Ralphs. The Company entered into a master license agreement with Ralphs
("Ralphs Master License") effective May 1, 1995, pursuant to which the Company
has the right to operate retail video sales and rental departments in Ralphs
at locations to be agreed upon by both parties. The Ralphs Master License has
a term of four years with respect to each location commencing on the date such
location opens for business. The Agreement may be renewed for two successive
three-year periods for a given location provided that such location realizes a
predetermined level of revenues. The Company pays a license fee to Ralphs
calculated as a percentage of gross revenues received in a given four- week
period. The Company has agreed not to operate a video store in any retail
outlet (including Wal-Mart SuperCenters and Super Kmart Centers) within a
three- mile radius of a Ralphs store in which the Company is operating a video
department. The Company has a right of first refusal to operate a video store
in all Ralphs locations. Ralphs has the right, subject to the Company's right
of first refusal, to lease space to another video rental operation having a
separate entrance. Upon 60 days' written notice and payment to the Company of
a predetermined termination fee, Ralphs may terminate the Ralphs Master
License. Ralphs may also terminate the Ralphs Master License if the Company
fails to meet minimum revenue levels. As of July 31, 1996, to the best of its
knowledge, the Company has met such minimum revenue levels. The Company may
terminate the Ralphs Master License on 60 days' written notice. There has been
no such termination of the Ralphs Master License to date.
MARKETING AND ADVERTISING
With advertising credits and market development funds that it receives from
its video suppliers and movie studios, the Company uses radio advertising,
direct mail, newspaper advertising, discount coupons and promotional materials
to promote new releases, its video stores and its tradename. Using copy
prepared by the Company and Star Video, advertising is primarily placed by the
distributor. Expenditures for marketing and advertising above the amount of
the Company's advertising credits from its suppliers and movie studios have
been minimal. The Company anticipates that marketing and advertising
expenditures, net of credits from its suppliers and allowances from movie
studios, will remain minimal after the consummation of the Distribution. The
Company also benefits from the advertising and marketing by studios and
theatres in connection with their efforts to promote films and increase box
office revenues.
GOVERNMENT REGULATION
The Company is subject to various federal, state and local laws, including
the Federal Videotape Privacy Protection Act and similar state laws that
govern the disclosure and destruction of video rental records. The Company
also must comply with various regulations affecting its business, including
state and local licensing, zoning, land use, construction and environmental
regulations.
42
<PAGE>
LEGAL PROCEEDINGS
The Company is subject to claims and suits in the ordinary course of
business. In management's opinion, currently pending legal proceedings and
claims against the Company will not, individually or in the aggregate, have a
material adverse effect on the Company's financial condition or results of
operations.
PROPERTIES
The Company leases space for each of its BlowOut Video stores pursuant to
various master leases described under the caption "Leases" above. The Company
leases approximately 6,124 sq. ft. of space for its principal executive
offices from Rentrak pursuant to a lease described herein under the caption
"Related Party Transactions--Office Leases." The Company also leases warehouse
space from Rentrak on a month-to-month basis in size and for rental rates that
adjust monthly. The average cost of warehouse space leased from Rentrak in
fiscal 1996 has been approximately $3,000 per month. See "Related Party
Transactions."
EMPLOYEES
As of September 30, 1996, the Company employed approximately 268 persons
full-time and 784 persons part time. None of the Company's employees is
covered by a collective bargaining agreement; however, in three Ralphs
locations, all non-management employees will be part of a collective
bargaining agreement. The Company does not expect to have more than nine
employees subject to this agreement. The Company provides medical insurance
and other benefits for eligible employees. The Company generally considers its
relationships with its employees to be good.
43
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The directors and executive officers of the Company, their ages and their
present positions with the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION AND OFFICES HELD
- ---- --- -------------------------
<S> <C> <C>
Steve Berns.............................. 38 President and Director
Karl D. Wetzel........................... 48 Chief Financial Officer
Harold Heyer............................. 36 Vice President of Operations
Eugene F. Giaquinto...................... 54 Chairman of the Board of Directors
F. Kim Cox............................... 44 Director
Bill LeVine.............................. 75 Director
Muneaki Masuda........................... 46 Director
</TABLE>
The Board of Directors is divided into three classes, as nearly equal in
number as possible. The initial three classes have been elected for one-, two-
, or three-year terms, and one class will be elected at each annual meeting of
stockholders thereafter for a three-year term. The Company's officers are
elected annually by and serve at the discretion of the Board of Directors.
There are no family relationships among directors or executive officers of the
Company.
The Company has determined to pay fees to its directors who are not officers
of the Company annual fees equal to $10,000 per annum of which $5,000 per year
is to be paid currently and $5,000 is to be deferred and not paid until the
Company has achieved profitability as well as $500 per meeting (including
telephonic board meetings). In addition, pursuant to the Company's 1996 Equity
Participation Plan, each director who is not an employee of the Company will
automatically receive an option to purchase 1,000 shares of BlowOut Common
Stock on the date of each annual meeting of stockholders after the
Distribution, each current non-employee member of the Company Board will
automatically receive an option to purchase 5,000 shares of BlowOut Common
Stock on the Distribution, and each new non-employee member of the Company
Board will receive an option to purchase 5,000 shares of BlowOut Common Stock
upon such person's initial election to the Company Board. No additional
compensation is intended to be, or has been paid, to such individuals in their
capacity as Directors. An aggregate of $2,000 has been paid to all such
directors in 1996. See "Management--1996 Equity Incentive Plan."
The Board of Directors has a Compensation Committee and an Audit Committee.
The Compensation Committee is comprised of Bill LeVine and Eugene Giaquinto
and is responsible for evaluating the performance of the Company's management,
determining the method of compensating the Company's salaried employees and
for administering and granting options under the Company's 1996 Equity
Incentives Plan.
The Audit Committee is comprised of Eugene Giaquinto and Bill LeVine and is
responsible for evaluating the integrity of the Company's financial reporting.
The Board does not have a nominating committee.
Following the Distribution, Mr. LeVine and Mr. Masuda will continue to serve
as directors of both Rentrak and the Company.
Steve Berns has been president of the Company since its inception in July
1992, and has been a director of the Company since March 21, 1996. Mr. Berns
was President of RKO Warner from 1986 to 1992, during which period RKO Warner
grew into the largest video retailer in the New York/New Jersey market and one
of the largest video retailers in the United States. From 1979 until 1986, Mr.
Berns held various positions with Video Shack, eventually becoming its
executive vice president of operations prior to its acquisition by RKO Warner.
From 1990 to 1992, Mr. Berns also served as a member of the Board of Directors
of the Video Software Dealers Association. Mr. Berns' term as a director is
scheduled to expire in 1999.
44
<PAGE>
Karl D. Wetzel has served as Chief Financial Officer of the Company since
February 1, 1996. He served as Chief Accounting Officer of Rentrak from
February 1, 1995 until February 1, 1996. From June 1, 1991, until February 1,
1995, Mr. Wetzel served as Vice President of Finance and Chief Financial
Officer of Rentrak. Prior to joining Rentrak in February of 1990, Mr. Wetzel
was Vice President of Finance and Chief Financial Officer for Safeguard
Security Systems, Inc.
Harold Heyer has served as Vice President of Operations of the Company since
September 1995. From 1994 through August 31, 1995, Mr. Heyer served as vice
president of sales and retail operations for SCE where he managed the growth
of SCE to 70 units inside Wal-Mart and Kmart. From 1982 until 1994, Mr. Heyer
served in a number of management positions with SuperClub, Blockbuster and
Major Video. Prior thereto, he served as general manager of Video 22, a six
story video specialty chain.
Eugene F. Giaquinto has served as a director of the Company since March 1996
and as Chairman of the Board of Directors since November 4, 1996. Mr.
Giaquinto is a founder and has been Chairman of the Board of R&G
Communications, a producer of independent films, since April 1989. From 1960
to 1989, Mr. Giaquinto served in various positions in finance, sales and
administration with MCA/Universal, including President of MCA Home
Entertainment. Mr. Giaquinto is a member of the Academy of Motion Picture Acts
& Sciences and a Commissioner for the Motion Picture Council. Mr. Giaquinto's
term as a director is scheduled to expire in 1999.
F. Kim Cox has served as a director of the Company since July 1992. Mr. Cox
currently serves as the Executive Vice President--Chief Financial Officer,
Secretary and Treasurer of Rentrak. Beginning in 1985, Mr. Cox has served and
is currently serving in a variety of senior management positions at Rentrak,
including Chief Financial Officer and Vice President Finance, and, from June
1991 to May 1995, Senior Vice President--Strategic Planning. Prior to joining
Rentrak in 1985, Mr. Cox was a practicing attorney. Mr. Cox's term as a
director is scheduled to expire in 1997. Mr. Cox intends to resign upon the
selection by the other members of the Company Board of a replacement.
Bill LeVine has served as a director of the Company since March 1996. Mr.
LeVine is the founder, and has been President, of LeVine Enterprises, Inc., an
investment firm, since its inception in January 1988. Mr. LeVine is a past
member of the Board of Directors of the International Franchise Association.
He has served as a director of Rentrak since April 1985. He also serves as a
director of First Business Bank, Los Angeles, California; B.C.T. Inc., Fort
Lauderdale, Florida; Fast Frame, Los Angeles, California; and California
Closet, Los Angeles, California. Mr. LeVine's term as a director is scheduled
to expire in 1998. See "Financing."
Muneaki Masuda has served as a director of the Company since July 1992. Mr.
Masuda has been the President and Chairman of Culture Convenience Club, Co.,
Ltd., a Japanese corporation principally engaged in the video, music and book
retail business, since December 1988. In 1990, he founded Rentrak Japan, a
joint venture of CCC and Rentrak. He has served as a director of Rentrak since
August 1990. Mr. Masuda's term as a director is scheduled to expire in 1998.
See "Financing."
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
In March 1996, the Company issued a $1.0 million convertible subordinated
note to Mr. Levine, a director of the Company and a member of the Compensation
Committee. This note was guaranteed by Rentrak, accrued interest at a rate of
9.0% per annum, and had a maturity date of August 31, 1997. On August 30,
1996, Mr. LeVine converted his Note into 121,789 Shares of BlowOut Common
Stock.
EXECUTIVE COMPENSATION
The following table sets forth certain summary information for the years
indicated concerning the compensation awarded to, earned by, or paid to Steve
Berns, the only executive officer of the Company whose salary and bonus
exceeded $100,000 during the most recent fiscal year.
45
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION(1)
---------------------------------------
OTHER
NAME AND PRINCIPAL POSITIONS YEAR SALARY BONUS COMPENSATION(2)(3)
- ---------------------------- ---- -------- ------ ------------------
<S> <C> <C> <C> <C>
Steve Berns............................. 1995 $131,625 $5,000 --
President and Chief Officer 1994 $142,961 -- --
1993 $140,000 -- --
</TABLE>
- --------
(1) Annual compensation does not include the cost to the Company of certain
benefits. The aggregate amount of such benefits, as to any executive
officer, did not exceed $13,662.
(2) Mr. Berns has been granted options for shares of Rentrak Common Stock
pursuant to the Company's 1986 Second Amended and Restated Stock Option
Plan ("Rentrak Plan") as follows: in calendar year 1995, options for
10,000 shares of Rentrak Common Stock at an exercise price of $5.00 per
share and options for 25,000 shares of Rentrak Common Stock at an exercise
price of $5.75 per share and, in calendar year 1996, options for 10,000
shares of Rentrak Common Stock at an exercise price of $4.625 per share.
No options for Rentrak Common Stock were granted to Mr. Berns in 1993 and
1994. At December 31, 1995, Mr. Berns held options to purchase 2,500
shares of Rentrak Common Stock which were then exercisable and options to
purchase 32,500 shares of Rentrak stock which were then unexercisable.
Based on the closing price of Rentrak Common Stock at December 31, 1995,
of $4-15/16 per share, none of such options were "in-the-money," and
therefore had no value at December 31, 1995. The Rentrak Plan is
administered by the Compensation Committee of the Rentrak Board which
determines to whom options are granted, the number of shares subject to
each option, the vesting schedule and the exercise price. Prior to March
26, 1996, the Stock Option Committee, a Subcommittee of the Compensation
Committee of the Rentrak Board, administered the Rentrak Plan Options. The
options expire 10 years after the date of grant and vest in equal annual
installments over four years. The options may be exercised for a period of
one month following termination of employment, except that under certain
circumstances options expire at the time of termination.
(3) Mr. Berns has been granted an option to purchase up to 25,000 shares of
BlowOut Common Stock pursuant to the 1996 Equity Participation Incentive
Plan described below at an exercise price of $2.50 per share. The option
is subject to immediate exercise and has a term of 10 years. The potential
realizable value at assumed annual rates of stock price appreciation for
the option term of 5% and 10%, respectively, is $223,500 and $512,000. See
--"1996 Equity Participation Incentive Plan."
EMPLOYMENT AGREEMENTS
The Company entered into an amended and restated employment agreement dated
as of March 1, 1996 and amended as of November 4, 1996 (the "Berns Agreement")
with Steve Berns, pursuant to which Mr. Berns will serve as President of the
Company until October 31, 1999, or until otherwise terminated pursuant to the
terms thereof. During the term of the Agreement, Mr. Berns is to receive a
base annual salary of $150,000 (the "Berns Base Salary"). The Berns Base
Salary shall automatically be increased by the percentage increase over the
preceding 12 month period, if any, and the Consumer Price Index for all Urban
Consumers, U.S. City Average beginning on October 1, 1996 and annually
thereafter. The Berns Agreement provides that the Company may pay Mr. Berns a
bonus or other additional compensation above the Base Salary at its
discretion. Under the Berns Agreement, the Company will provide Mr. Berns with
vacation and holiday pay comparable to that provided by Rentrak to its
executives pursuant to policies in effect on the date of the Berns Agreement,
medical and life insurance under the Company's then-current terms, a car
allowance of $500 per month, and reimbursement for relocation expenses to
Portland, Oregon. If, during the term of the Berns Agreement, more than 70% of
the stock of the Company is sold by Rentrak in a public offering, or more than
50% of the stock of the Company is sold by Rentrak in a private sale, the
Company shall pay to Mr. Berns the greater of $100,000 or 1% of the gross
revenues realized from such stock sale. Under this provision, Mr. Berns is to
be paid a $100,000 bonus upon completion of the Distribution.
46
<PAGE>
The Berns Agreement may be terminated with cause by either the Company or
Mr. Berns upon 30 days' written notice to the other party. If termination is
due to Mr. Berns' death or disability, the Company will pay a lump sum
severance payment of an amount equal to the Berns Base Salary accrued through
and including the date of termination. If termination is by the Company for
other than for cause by employer or death or disability of Mr. Berns, the
Company will pay him severance payments in an amount six months of the annual
Base Salary, subject to demonstration by Mr. Berns that he is using his best
efforts to find other employment. The Agreement also contains a
nonsolicitation covenant and agreement not to disclose confidential
information. On October 26, 1995, Mr. Berns and the Company entered into a
non-competition agreement, which was subsequently amended on December 12,
1995. Under such agreement, during the period of his employment with the
Company, and for 24 months after such employment shall have terminated, Mr.
Berns will not engage in any business involving video store departments which
are inside either mass market or grocery retailers anywhere in the United
States or other geographical area where the Company conducts its business or
sells or distributes its products or services.
Effective February 1, 1996 and amended as of November 4, 1996, the Company
entered into an employment agreement with Karl Wetzel, pursuant to which Mr.
Wetzel will serve as Chief Financial Officer of the Company until January 31,
1999 or until otherwise terminated pursuant to the terms thereof (the "Wetzel
Agreement"). During the term of the Wetzel Agreement, Mr. Wetzel is to receive
a base annual salary of $100,000 (the "Wetzel Base Salary"), payable in equal
semi-monthly installments. Commencing May 1, 1996, and on each May 1st during
the term of the agreement thereafter, the Company has agreed to review the
Wetzel Base Salary and may, at such time and in its discretion, increase the
Wetzel Base Salary. The Wetzel Agreement further provides that Mr. Wetzel will
participate in any bonus plan adopted by the Company, including any cash bonus
pools established by the Company from time to time for its corporate
executives. In addition, the Company has agreed to pay Mr. Wetzel a $50,000
bonus within 10 days after the date, if any, on which the Company's common
stock commences trading on any national stock exchange or on NASDAQ. The
Wetzel Agreement also requires the Company to pay Mr. Wetzel a severance
payment of an amount equal to the Wetzel Base Salary accrued through and
including the date of termination if Mr. Wetzel's employment is terminated due
to his death or disability. If termination is by the Company other than for
cause or Mr. Wetzel's death or disability, the Company will pay him severance
payments in an amount equal to six months of the annual Wetzel Base Salary,
subject to the demonstration by Mr. Wetzel that he is using his best efforts
to find other employment. The Wetzel Agreement provides that any unvested
options granted to Mr. Wetzel by Rentrak relating to Mr. Wetzel's service as
an officer of Rentrak Home Entertainment ("RHE"), a division of Rentrak, shall
continue to vest pursuant to their terms as if Mr. Wetzel were still employed
by RHE. Pursuant to the Wetzel Agreement, Mr. Wetzel and the Company entered
into a non-competition agreement pursuant to which during the period of his
employment with the Company, and for 24 months after such employment shall
have terminated, Mr. Wetzel will not engage in any business involving video
store departments which are inside either mass market or grocery retailers
anywhere in the United States or other geographical area where the Company
conducts its business or sells or distributes its products or services.
Effective April 22, 1996 and amended as of November 4, 1996, the Company
entered into an employment agreement (the "Heyer Agreement") with Harold
Heyer, pursuant to which Mr. Heyer will serve as Vice President of Operations
of the Company until August 30, 1998 or until otherwise terminated pursuant to
the terms thereof. During the term of the Heyer Agreement, Mr. Heyer receives
an annual base salary of $90,000 (the "Heyer Base Salary"). The Company has
agreed to reimburse Mr. Heyer for expenses in relocating to Portland, Oregon
in a maximum amount of $30,000. The Company has agreed to employ Mr. Heyer for
at least 12 months following his relocation to Portland, Oregon, or, if Mr.
Heyer is involuntarily terminated within such twelve-month period, but not for
cause, the Company will pay Mr. Heyer an amount equal to 90 days of the Heyer
Base Salary. If Mr. Heyer's employment is terminated due to Mr. Heyer's death
or disability, the Company will pay Mr. Heyer a lump sum severance payment in
an amount equal to the Heyer Base Salary accrued through and including the
date of termination. If, within two years after a Change of Control (as
defined in the Heyer Agreement) termination is by the Company without cause,
or by Mr. Heyer for Good Reason (as defined in the Heyer Agreement) the
Company shall pay to Mr. Heyer a lump sum payment in an amount equal to the
lesser of (i) the Heyer Base Salary through August 30, 1998, or (ii) six
months of the Heyer Base Salary.
47
<PAGE>
If termination is by the Company other than for cause or Mr. Heyer's death or
disability, the Company will pay him severance payments in an amount equal to
six months of the annual Heyer Base Salary, subject to the demonstration by
Mr. Heyer that he is using his best efforts to find other employment, and
further subject to reduction by the amount of remuneration in any form
received from such other employment during such six month period. The Heyer
Agreement also contains Mr. Heyer's agreement not to disclose confidential
information and a non-competition agreement, pursuant to which, during the
period of his employment with the Company and for 24 months after such
employment shall have terminated, Mr. Heyer will not engage in any business
(i) involving the revenue sharing method of wholesale distribution of home
video cassettes, (ii) which is substantially similar to leased store video
operations, or (iii) which competes with any business then engaged in by the
Company or its affiliates any where in the United States or other geographical
area where the Company conducts its business or sells or distributes its
products or services.
INDEMNITY AGREEMENTS
BlowOut and each present director and officer of BlowOut have executed an
indemnity agreement (collectively, the "Indemnity Agreements"). The Board of
Directors of BlowOut and Rentrak, as the sole stockholder of BlowOut at the
time the Indemnity Agreements were executed and delivered, approved the form
of such Indemnity Agreements. BlowOut intends to enter into similar Indemnity
Agreements with all of its future directors and officers.
In general, the Indemnity Agreements seek to afford such directors and
officers the maximum indemnification protection allowed under Delaware law.
Below is a summary of the general provisions of the Indemnity Agreements.
Indemnification in Third-Party Proceedings. Pursuant to the Indemnity
Agreements, BlowOut will indemnify the directors and officers of BlowOut who
are parties to the Indemnity Agreements against all expenses of
investigations, judicial or administrative proceedings or appeals, whether
threatened, pending or completed, and amounts paid in settlement and
attorneys' fees actually and reasonably incurred in defense or settlement of
any civil, criminal or administrative proceedings relating to actions taken by
such director or officer in his capacity as such director or officer, provided
only that the director or officer acted in good faith and in a manner that he
or she reasonably believed to be in or not opposed to the best interests of
BlowOut. In addition, if the director or officer is involved in a criminal
proceeding, BlowOut will indemnify the director or officer if he or she had no
reasonable cause to believe that the conduct was unlawful. A settlement or
judgment or plea of nolo contendere will not, by itself, create a presumption
that the director or officer is not entitled to be indemnified. No
indemnification is permitted for any acts or omissions or transactions from
which directors may not be relieved of liability under Delaware law as
referred to above.
Derivative Suits. BlowOut will indemnify BlowOut's directors and officers
who are parties to the Indemnity Agreements against similar expenses and
settlement payments incurred in similar actions brought in the name or the
right of BlowOut and arising from the director's or officer's service to
BlowOut. No indemnification is provided where the director or officer is
ultimately held liable to BlowOut unless a court should so determine, nor will
indemnification be made for any action not taken in good faith and in a manner
reasonably believed to be in or not opposed to the best interests of BlowOut,
as the case may be, and their respective stockholders. Furthermore, no
indemnification is permitted for any acts or omissions or transactions from
which directors may not be relieved of liability under Delaware law. Sections
145(a) and 145(b) of the DGCL, which grant corporations the power to indemnify
directors and officers, specifically authorize lesser indemnification in
connection with derivative claims than in connection with third-party claims.
The distinction is that Section 145(a), concerning third-party claims,
authorizes indemnification of expenses and judgments and amounts paid in
settlement (as provided in the Indemnity Agreements), but Section 145(f)
expressly provides that the indemnification and advancement of expenses
provided by or granted pursuant to the other subsections of Section 145 shall
not be exclusive of any other rights to which those seeking indemnification
may be entitled under any agreement. No Delaware case directly answers the
question of whether Delaware's public policy would support this aspect of the
Indemnity Agreements under the authority of Section 145(f), or would cause its
invalidation because it did not conform to the distinctions contained in
Sections 145(a) and 145(b).
48
<PAGE>
Procedure for Indemnification. BlowOut promptly will indemnify any director
or officer of BlowOut pursuant to the Indemnity Agreements unless it is
determined by a majority of disinterested directors or by independent counsel
that the actions of the director or officer did not meet the relevant standard
for indemnification. If such disinterested directors or independent counsel
determines that the requisite standard of conduct has not been met in a
particular instance, the director or officer seeking indemnification may
petition the court for an independent determination. In any such action,
BlowOut will have the burden of proving that indemnification is not proper.
The failure of the disinterested directors to make a determination that the
director or officer failed to meet the applicable standard of conduct. The
indemnitee's right to indemnification under the Indemnity Agreement will
continue even though he or she may have ceased to be a director or officer and
will inure to the benefit of the indemnitee's heirs and personal
representatives.
Advance of Expenses. BlowOut will advance to any such director or officer
expenses of the defense of any proceeding if the director or officer
undertakes to repay any amount advanced in the event it is determined that he
or she is not entitled to indemnification and certifies to BlowOut that the
director or officer has met the relevant standards for indemnification.
Partial Indemnity. If the director or officer is not entitled to
indemnification of all expenses but is entitled to indemnification of some
expenses, BlowOut will indemnify the director or officer for that portion of
the expenses to which he or she is otherwise entitled to indemnification.
Insurance. The Indemnity Agreements provide that BlowOut may obtain and
maintain in effect directors' and officers' insurance.
Pursuant to their terms, the Indemnity Agreements will cover acts or
omissions that occurred prior to BlowOut's execution and delivery of the
Indemnity Agreements. There is no recent, pending or, to the best knowledge of
BlowOut, threatened litigation involving any director or officer of BlowOut,
where indemnification under the Indemnity Agreement would be required or
permitted.
1996 EQUITY PARTICIPATION INCENTIVE PLAN
In April 1996, the Company adopted an equity incentive plan (the "1996
Equity Incentive Plan"). Under the 1996 Equity Incentive Plan, the Company may
grant incentive stock options within the meaning of Section 422 of the
Internal Revenue Code of 1986, as amended, and nonstatutory stock options to
key employees, officers and consultants to allow them to participate in the
ownership and growth of the Company. The Compensation Committee (consisting of
persons who are "disinterested persons" within the meaning of Rule 16b-3 under
the Exchange Act and "outside directors" within the meaning of Section 162(m)
of the Code) of the Company Board has discretion, within the limits of the
1996 Equity Incentive Plan, to designate recipients, amounts, exercise prices
and other terms and conditions of the stock options to key employees
(including employees who may also be officers and directors of the Company),
officers and consultants of the Company. The 1996 Equity Incentive Plan also
provides for automatic grants of options for predetermined numbers of shares
of Common Stock to non-employee directors of the Company. Upon the occurrence
of a change of control or certain corporate transactions, any option granted
under the 1996 Equity Incentive Plan to non-employee directors shall become
fully exercisable and vested, subject to certain conditions, including
compliance with Section 16(b) of the Exchange Act, while the Compensation
Committee will have the discretion to accelerate vesting or take other action
with respect to all other options granted under the 1996 Equity Incentive
Plan. A total of up to 500,000 shares of BlowOut Common Stock are reserved for
issuance under the 1996 Equity Incentive Plan. Furthermore, the maximum number
of shares which may be subject to options granted under the 1996 Equity
Incentive Plan to any individual in any fiscal year cannot exceed $150,000.
On November 4, 1996, options to purchase a total of 45,000 shares of BlowOut
Common Stock were granted to three executive officers of the Company,
(including Steve Berns, President), at an exercise price of $2.50 per share.
The options, which are to vest in four equal annual installments, were granted
by the Compensation Committee to align the interest of senior management with
the interest of the BlowOut shareholders. The options are nonstatutory stock
options, and optionholders will recognize income on the difference between the
fair market value of the shares subject to the options and the exercise price
of the options.
49
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the BlowOut Common Stock as of August 31, 1996, and as adjusted
to reflect the Distribution, by (i) all stockholders known by the Company to
be beneficial owners of more than 5% of the outstanding BlowOut Common Stock
immediately prior to the Distribution, (ii) each director of the Company,
(iii) each of the Named Executive Officers, and (iv) all executive officers
and directors of the Company as a group.
<TABLE>
<CAPTION>
BEFORE DISTRIBUTION POST DISTRIBUTION SHARES
----------------------- ------------------------
NUMBER PERCENT NUMBER PERCENT
------------ ---------- ------------- ------------
STOCKHOLDER/(1)/(2)
- -------------------
<S> <C> <C> <C> <C>
Steve Berns.................. -0- * -0- *
Karl Wetzel.................. -0- * 165 *
Harold Heyer................. -0- * 119 *
F. Kim Cox................... -0- * 239 *
Eugene F. Giaquinto.......... -0- * -0- *
Bill LeVine.................. 121,789 5.0% 173,447 7.1%
Muneaki Masuda/(3)/.......... 484,718 19.9 604,624 24.8
Rentrak Corporation.......... 1,698,942 69.8 241,599 9.9
All directors and executive
officers as a group (7 per-
sons)....................... 606,507 24.9 778,594 32.0
</TABLE>
- --------
* Less than 1%.
(1) The address of Rentrak and of all executive officers is 7227 NE 55th
Avenue, Portland, Oregon 97218.
(2) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission (the "Commission") and generally
includes voting or investment power with respect to securities. Shares of
BlowOut Common Stock subject to options or warrants exercisable or
convertible within 60 days are deemed outstanding for computing the
percentage of the person or group holding such options or warrants, but
are not outstanding for computing the percentage of any other person.
Except as indicated in the footnotes to this table and subject to
applicable community property laws, the persons named in the table have
sole voting and investment power with respect to all shares of BlowOut
Common Stock beneficially owned.
(3) These shares are held of record by CCC. Mr. Masuda, as president and
principal shareholder of CCC is deemed to be the beneficial owner of
shares of BlowOut Common Stock owned by CCC.
50
<PAGE>
DESCRIPTION OF COMPANY CAPITAL STOCK
The Company's authorized capital stock consists of (i) 10,000,000 shares of
common stock, par value $.01 per share (the "BlowOut Common Stock"), of which
2,433,330 shares are issued and outstanding, and (ii) 1,000,000 shares of
preferred stock (the "BlowOut Preferred Stock"), of which no shares are
currently issued and outstanding.
BLOWOUT PREFERRED STOCK
Pursuant to the Certificate of Incorporation of the Company, the Company
Board by resolution may establish one or more series of BlowOut Preferred
Stock having such number of shares, designation, relative voting rights,
dividend rates, liquidation and other rights, preferences and limitations as
may be fixed by the Company Board without any further stockholder approval.
Such rights, preferences, privileges and limitations as may be established
could have the effect of impeding the acquisition of control of the Company.
As of the date hereof, there are no shares of BlowOut Preferred Stock issued
and outstanding.
BLOWOUT COMMON STOCK
Each holder of BlowOut Common Stock is entitled to one vote per share on all
matters, including the election of directors, and does not have the right to
cumulate his votes in the election of directors, subject only to certain
matters involving only the rights of holders of any subsequently issued
Preferred Stock. Each holder of BlowOut Common Stock will be entitled to such
dividends as the Company Board may declare from time to time from funds
legally available therefor, subject to the preferential rights of any
outstanding shares of any BlowOut Preferred Stock and the requirements of the
Delaware General Corporation Law. Upon liquidation, each holder of BlowOut
Common Stock will be entitled to share in the assets of the Company pro rata
and in accordance with his holdings, after payment and satisfaction of all
debts, allowances, expenses, costs and liens, and subject to the preferential
rights of holders of any subsequently issued BlowOut Preferred Stock. The
BlowOut Common Stock has no preemptive, redemption, conversion or subscription
rights. Shares of BlowOut Common Stock outstanding on the date of this
Information Statement are fully paid and nonassessable.
PRE-DISTRIBUTION STOCK DIVIDEND
Effective as of October 9, 1996, the Company's Board of Directors declared a
stock dividend pursuant to which each holder of record of BlowOut Common Stock
on October 9, 1996 received .01491 shares of BlowOut Common Stock in respect
of each share of BlowOut Common Stock outstanding on such date. The purpose of
the stock dividend was to adjust the number of outstanding shares of BlowOut
Common Stock in order to minimize fractional shares (i.e., so that in the
Distribution Rentrak would distribute one share of BlowOut Common Stock for
every ten issued and outstanding shares of Rentrak Common Stock). Assuming
that the number of outstanding shares of Rentrak Common Stock on the Record
Date is 12,154,239, the same number outstanding on October 31, 1996, the
Company's Board of Directors will not make any further adjustment in the
number of shares of BlowOut Common Stock. However, if the number of shares of
BlowOut Common Stock at the Record Date is more or less than 12,154,239, the
Board of Directors of the Company may make a further adjustment in the number
of shares of BlowOut Common Stock in order to minimize fractional shares in
the Distribution. See "The Distribution--Manner of Effecting the
Distribution."
CERTAIN PROVISIONS OF THE CERTIFICATE OF INCORPORATION, BYLAWS AND DELAWARE
CORPORATION LAW
DIRECTORS
The Bylaws provide that the number of directors constituting the Board of
Directors shall be not less than five nor more than nine, with the exact
number to be fixed by resolution of the Board of Directors, and that vacancies
on the Board of Directors (including vacancies created by an increase in the
number of directors) may be filled by the Board of Directors, acting by a
majority of the remaining directors then in office. As permitted
51
<PAGE>
by Delaware law, the Board of Directors is divided into three classes, as
nearly equal in number as possible. The initial three classes have been
elected for one-, two-, or three-year terms, and one class will be elected at
each annual meeting of stockholders thereafter for a three-year term.
Stockholders may remove directors only for cause.
The Bylaws of the Company also contain provisions, requiring advance notice
of nominations for directors and items to be placed on the agenda of meetings
by stockholders, and requiring that persons desiring to call a special meeting
of stockholders holding at least 10% of the outstanding capital stock. These
provisions are designed to prevent a hostile acquiror of the Company's
securities from presenting proposals to the stockholders without giving
adequate notice, thereby permitting the Board of Directors to consider and
prepare a response to such proposals. These provisions do not give the Board
of Directors any power to approve or disapprove of stockholder proposals. They
may have the effect, however, of precluding the consideration of such business
at a meeting if the procedures established are not followed, any may
discourage a third party from submitting a proposal without regard to whether
this might be harmful or beneficial to the Company and its stockholders.
LIMITATION OF LIABILITY AND INDEMNIFICATION
As permitted by the Delaware General Corporation Law, the Certificate of
Incorporation provides that directors of the Company shall not be personally
liable to the Company or its stockholders for monetary damages for breach of
fiduciary duty as a director, except for liability (i) for any breach of the
director's duty of loyalty to the Company or its stockholders, (ii) for acts
or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) under Section 174 of the Delaware General
Corporation Law or (iv) for any transaction from which the director derives an
improper personal benefit. In addition, the Bylaws provide that the Company
shall, to the fullest extent authorized by the Delaware General Corporation
Law, as amended from time to time, indemnify all directors and officers and
may, at the election of the Company as determined by the Board of Directors,
indemnify all other persons serving at the request of the Company as a
director, officers, employee or agent of another corporation or of a
partnership, trust or other enterprise.
DELAWARE BUSINESS COMBINATION STATUTE
Section 203 of the Delaware General Corporation Law ("Section 203") provides
that, subject to certain exceptions specified therein, an interested
stockholder of a Delaware corporation shall not engage in any business
combination with the corporation for a three-year period following the time
that such stockholder becomes an interested stockholder unless (i) prior to
such time, the board of directors of the corporation approved either the
business combination or the transaction which resulted in the stockholder
becoming an interested stockholder, (ii) upon consummation of the transaction
which resulted in the stockholder becoming an interested stockholder, the
interested stockholder owned at least 85% of the voting stock of the
corporation outstanding at the time the transaction commenced (excluding
certain shares) or (iii) on or subsequent to such time, the business
combination is approved by the board of directors of the corporation and
authorized at an annual or special meeting of stockholders by the affirmative
vote of at least 66-2/3% of the outstanding voting stock which is not owned by
the interested stockholder. Except as otherwise specified in Section 203, an
interested stockholder is defined to include (x) any person that is the owner
of 15% or more of the outstanding voting stock of the corporation, or is an
affiliate or associate of the corporation, and was the owner of 15% or more of
the outstanding voting stock of the corporation at any time within three years
immediately prior to the relevant date and (y) the affiliates and associates
of any such person.
Under certain circumstances, Section 203 makes it more difficult for a
person who would be an interested stockholder to effect various business
combinations with a corporation for a three-year period, although the
stockholders may elect to exclude a corporation from the restrictions imposed
thereunder. The Certificate of Incorporation does not exclude the Company from
the restrictions imposed under Section 203. The provisions of Section 203 may
encourage companies interested in acquiring the Company to negotiate in
advance with the Board of Directors since the stockholder approval requirement
would be avoided if a majority of the directors then in office approve either
the business combination or the transaction which results in the stockholder
52
<PAGE>
becoming an interested stockholder. Such provisions also may have the effect
of preventing changes in the management of the Company. It is possible that
such provisions could make it more difficult to accomplish transactions which
stockholders may otherwise deem to be in their best interests.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the BlowOut Common Stock is U.S. Stock
Transfer Corporation.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this Distribution, the Company will have outstanding
2,433,330 shares of BlowOut Common Stock. Of such shares, the Company believes
that the 1,457,343 shares distributed in this Distribution will be freely
transferrable without restrictions or further registration under the
Securities Act, unless acquired by an affiliate of the Company, in which case
those shares will be subject to the resale limitations of Rule 144 or unless
such shares were received by persons who were holders of restricted shares of
Rentrak Common Stock, in which case such holders will receive BlowOut Common
Stock containing the same such restrictions. The remaining 975,987 shares of
BlowOut Common Stock are "restricted securities" within the meaning of
Rule 144 (the "Restricted Shares").
Except as provided below, the Restricted Shares will be eligible for sale in
the public market, in accordance with Rule 144. Immediately following the
Distribution, 182,450 shares of BlowOut Common Stock held by Rentrak or a
subsidiary of Rentrak will be available for sale under Rule 144 of the
Securities Act of 1933, as amended (the "Securities Act"), subject to the
volume and other restrictions of Rule 144. An additional 121,789, 121,789,
187,028 and 362,931 shares of BlowOut Common Stock will become available for
sale under Rule 144, subject in certain cases to volume restrictions, in each
of March, April, May and August of 1998, respectively.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned Restricted Shares for
at least two years, including persons who may be deemed to be "affiliates" of
the Company, as that term is defined under Rule 144, may sell within any
three-month period a number of Restricted Shares that does not exceed the
greater of one percent of the then outstanding shares of BlowOut Common Stock
(approximately 24,333 shares) or the average weekly trading volume of BlowOut
Common Stock on the open market during the four calendar weeks preceding such
sale. Sales under Rule 144 are also subject to certain manner-of-sale
limitations, notice requirements, and the availability of current public
information about the Company. Pursuant to Rule 144(k), a person (or persons
whose shares are aggregated) who is deemed not to have been an "affiliate" of
the Company at any time during the three months preceding a sale, and who has
beneficially owned Restricted Shares for at least three years, would be
entitled to sell such shares under Rule 144 without regard to volume
limitations, manner-of-sale provisions or notice requirements. Restricted
Shares properly sold in reliance upon Rule 144 are thereafter freely tradeable
without restrictions or registration under the Securities Act, unless
thereafter held by an "affiliate" of the Company.
Prior to this Distribution there has been no market for the Common Stock,
and no prediction can be made as to the effect, if any, that sales of
Restricted Shares, or availability of Restricted Shares for sale, by existing
stockholders in reliance upon Rule 144 or otherwise will have on the market
price of BlowOut Common Stock. The sale by the Company or the stockholders
referred to above of a substantial number of shares of BlowOut Common Stock
after this Distribution could adversely affect the market price for the
BlowOut Common Stock. A total of 848,108 shares of BlowOut Common Stock issued
to Mr. LeVine and to CCC upon conversion of Notes, issued to CCC for cash, and
held by Rentrak following the Distribution, are subject to Registration Rights
Agreements which provide demand and "piggyback" registration rights. In
addition, the Company has granted the E-1 Minority "piggyback" registration
rights with respect to the 127,879 shares of "restricted securities," which
generally grant the E-1 Minority the right to request registration of their
shares of the Company's common stock in connection with the filing by the
Company of a Registration Statement with respect to an offering of any equity
securities by the Company for its own account or for the account of any of its
equity holders (other
53
<PAGE>
than any registration filed in connection with the offer or sale to the
management of the Company of securities pursuant to an employee stock plan or
other employee benefit plan arrangement). See "Financing--Registration
Rights."
AVAILABLE INFORMATION
The Company has filed with the Commission the Form 10 Registration Statement
under the Exchange Act with respect to the BlowOut Common Stock. This
Information Statement does not contain all of the information set forth in the
Form 10 Registration Statement. For further information with respect to the
Company and the Securities offered hereby, reference is made to such
Registration Statement and the exhibits and schedules thereto. Statements
contained in this Information Statement as to the contents of any contract or
any other document referred to are not necessarily complete. With respect to
each such contract or other document filed as an exhibit to the Form 10
Registration Statement reference is made to the exhibit for a more complete
description of the matters involved, and each such statement shall be deemed
qualified in its entirety by such reference.
Following the consummation of the offering, the Company will be subject to
the informational requirements of the Exchange Act and in accordance therewith
will be required to file reports and other information with the Commission.
The Company intends to furnish its stockholders with annual reports containing
audited financial statements reported on by independent public accountants
following the end of each fiscal year, and quarterly reports containing
unaudited financial statements for the first three quarters of each fiscal
year following the end of each such fiscal quarters. A copy of the Form 10
Registration Statement, including exhibits and schedules thereto, filed by the
Company with the Commission may be inspected without charge at the public
reference facility maintained by the Commission at Room 1024, Judiciary Plaza,
450 Fifth Street, N.W., Washington, D.C. 20549, and at the following Regional
Offices of the Commission: New York Regional Office, Seven World Trade Center,
13th Floor, New York, New York 10007; and Chicago Regional Office, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such material
may be obtained from the Public Reference Section of the Commission, 450 Fifth
Street, N.W., Washington, D.C. 20549 upon the payment of fees prescribed by
the Commission. In addition, the Commission maintains a Web site that contains
reports, proxy and information statements and other information regarding
registrants that file electronically with the Commission at
http://www.sec.gov.
54
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
BlowOut Entertainment, Inc.
Report of Independent Public Accountants................................. F-2
Balance Sheets of Blowout Entertainment, Inc. (audited) as of December
31, 1995 and 1994....................................................... F-3
Statements of Operations of BlowOut Entertainment, Inc. (audited)
for the three years ended December 31, 1995, 1994 and 1993.............. F-4
Statements of Stockholders' Equity (Deficit) of BlowOut Entertainment,
Inc. (audited)
for the three years ended December 31, 1995, 1994 and 1993.............. F-5
Statements of Cash Flows of BlowOut Entertainment, Inc. (audited)
for the three years ended December 31, 1995, 1994 and 1993.............. F-6
Notes to Financial Statements............................................ F-7
SuperCenter Entertainment Corporation--Retail Division
Report of Independent Public Accountants................................. F-17
Balance Sheets of SuperCenter Entertainment Corporation--Retail Division
(the predecessor of
W-1 Incorporated and K-1 Incorporated) (audited) as of December 31,
1994, 1993 and 1992..................................................... F-18
Statements of Operations of SuperCenter Entertainment Corporation--Retail
Division (audited)
for the years ended December 31, 1994, 1993 and 1992.................... F-19
Notes to Financial Statements............................................ F-20
Entertainment One, Inc.--Wal-Mart Stores Business
Report of Independent Public Accountants................................. F-24
Statement of Assets and Liabilities of Entertainment One, Inc.--Wal-Mart
Stores Business
(audited) as of July 31, 1994 and 1993.................................. F-25
Statements of Revenues and Expenses of Entertainment One, Inc.--Wal-Mart
Stores Business (audited) for the year ended July 31, 1994 and 10 months
ended July 31, 1993..................................................... F-26
Notes to Financial Statements............................................ F-27
BlowOut Entertainment, Inc.--Interim Period Financial Statements (unau-
dited)
Balance Sheet of BlowOut Entertainment, Inc. (unaudited) as of June 30,
1996 and 1995........................................................... F-31
Statement of Operations of BlowOut Entertainment, Inc. (unaudited)
for the quarters ended September 30, 1996 and 1995...................... F-32
Statement of Operations of BlowOut Entertainment, Inc. (unaudited)
for the nine month periods ended September 30, 1996 and 1995........... F-33
Statement of Cash Flows of BlowOut Entertainment (unaudited)
for the nine month periods ended September 30, 1996 and 1995........... F-34
Notes to Financial Statements............................................ F-35
Statement of Operations of BlowOut Entertainment, Inc. (unaudited)
for the year ended December 31, 1995.................................... F-39
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To BlowOut Entertainment, Inc.:
We have audited the accompanying consolidated balance sheets of BlowOut
Entertainment, Inc. and subsidiaries (a Delaware corporation) as of December
31, 1995 and 1994, and the related consolidated statements of operations,
stockholders' equity (deficit) and cash flows for each of the three years in
the period ended December 31, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of BlowOut Entertainment,
Inc. and subsidiaries as of December 31, 1995 and 1994, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1995 in conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
Arthur Andersen LLP
Portland, Oregon,
May 28, 1996
(except with respect to the
stock dividend discussed
in Note 7, as to which the
date is October 9, 1996)
F-2
<PAGE>
BLOWOUT ENTERTAINMENT, INC.
CONSOLIDATED BALANCE SHEETS--AS OF DECEMBER 31, 1995 AND 1994
ASSETS
<TABLE>
<CAPTION>
1995 1994
----------- ----------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents............................ $ 2,493,541 $ 66,162
Restricted cash...................................... 113,297 --
Trade receivables.................................... 65,585 42,979
Other receivables.................................... 276,324 --
Merchandise inventory................................ 984,894 18,000
Other current assets................................. 244,426 13,837
----------- ----------
Total current assets................................ 4,178,067 140,978
RENTAL INVENTORY, net................................. 5,715,093 323,379
EQUIPMENT AND LEASEHOLD IMPROVEMENTS, net............. 3,481,308 424,345
INTANGIBLE ASSETS, net of accumulated amortization of
$260,208............................................. 4,896,092 --
OTHER ASSETS, net of accumulated amortization of
$12,713.............................................. 265,935 4,446
----------- ----------
Total assets........................................ $18,536,495 $ 893,148
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable..................................... $ 3,278,553 $ 17,260
Accrued liabilities.................................. 1,150,174 233,842
Accrued payroll...................................... 178,310 8,743
Other current liabilities............................ 67,719 --
Current portion of long-term debt.................... 326,287 --
Current portion of payable to parent................. -- 296,166
----------- ----------
Total current liabilities........................... 5,001,043 556,011
LONG-TERM DEBT........................................ 640,789 --
PAYABLE TO PARENT..................................... 2,800,000 1,375,000
----------- ----------
Total liabilities................................... 8,441,832 1,931,011
----------- ----------
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred stock ($.01 par value; 1,000,000 shares au-
thorized)........................................... -- --
Common stock ($.01 par value; 10,000,000 and
1,000,000 shares authorized in 1995 and 1994, re-
spectively; 1,800,000 and 900,000 shares issued and
outstanding in 1995 and 1994, respectively)......... 18,000 9,000
Additional paid-in capital........................... 16,974,200 866,000
Retained deficit..................................... (6,897,537) (1,912,863)
----------- ----------
Total stockholders' equity (deficit)................ 10,094,663 (1,037,863)
----------- ----------
Total liabilities and stockholders' equity.......... $18,536,495 $ 893,148
=========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-3
<PAGE>
BLOWOUT ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
1995 1994 1993
----------- ---------- ----------
<S> <C> <C> <C>
REVENUE:
Rental revenue........................... $ 7,689,018 $1,115,316 $ 467,247
Product and other sales.................. 3,029,471 177,516 68,641
----------- ---------- ----------
10,718,489 1,292,832 535,888
----------- ---------- ----------
OPERATING COSTS AND EXPENSES:
Cost of rental revenue................... 3,268,629 408,566 225,428
Cost of product and other sales.......... 1,951,132 154,750 56,054
Operating expenses....................... 6,274,661 852,208 631,822
Selling, general and administrative...... 3,277,818 308,813 328,632
----------- ---------- ----------
14,772,240 1,724,337 1,241,936
----------- ---------- ----------
LOSS FROM OPERATIONS...................... (4,053,751) (431,505) (706,048)
OTHER INCOME (EXPENSE):
Interest income.......................... 3,540 -- 172
Interest expense......................... (532,836) (161,700) (50,825)
Other, net............................... (401,627) (250,819) (105,668)
----------- ---------- ----------
Total other income (expense)............ (930,923) (412,519) (156,321)
----------- ---------- ----------
LOSS BEFORE INCOME TAXES.................. (4,984,674) (844,024) (862,369)
INCOME TAXES.............................. -- -- --
----------- ---------- ----------
NET LOSS.................................. $(4,984,674) $ (844,024) $ (862,369)
=========== ========== ==========
NET LOSS PER COMMON SHARE................. $ (3.41) $ (.93) $ (.95)
=========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-4
<PAGE>
BLOWOUT ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE THREE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
TOTAL
COMMON STOCK ADDITIONAL STOCKHOLDERS'
----------------- PAID-IN RETAINED EQUITY
SHARES AMOUNT CAPITAL DEFICIT (DEFICIT)
--------- ------- ----------- ----------- ------------- --- --- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, December 31,
1992................... 900,000 $ 9,000 $ 516,000 $ (206,470) $ 318,530
Capital contributed by
parent................ -- -- 350,000 -- 350,000
Net loss............... -- -- -- (862,369) (862,369)
--------- ------- ----------- ----------- -----------
BALANCE, December 31,
1993................... 900,000 9,000 866,000 (1,068,839) (193,839)
Net loss............... -- -- -- (844,024) (844,024)
--------- ------- ----------- ----------- -----------
BALANCE, December 31,
1994................... 900,000 9,000 866,000 (1,912,863) (1,037,863)
Capital contributed for
Entertainment One,
Inc. acquisition...... 900,000 9,000 4,369,260 -- 4,378,260
Capital contributed for
Supercenter
Entertainment
Corporation
acquisition........... -- -- 5,213,125 -- 5,213,125
Conversion of
borrowings and accrued
interest due to parent
to equity............. -- -- 6,525,815 -- 6,525,815
Net loss............... -- -- -- (4,984,674) (4,984,674)
--------- ------- ----------- ----------- -----------
BALANCE, December 31,
1995................... 1,800,000 $18,000 $16,974,200 $(6,897,537) $10,094,663
========= ======= =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-5
<PAGE>
BLOWOUT ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
1995 1994 1993
----------- --------- ----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................. $(4,984,674) $(844,024) $ (862,369)
Adjustments to reconcile net loss to net
cash used in operating activities--
Amortization of videocassette rental in-
ventory................................. 1,528,640 179,293 148,852
Depreciation............................. 456,293 166,545 98,730
Amortization of intangible and other as-
sets.................................... 272,921 -- --
Changes in assets and liabilities ac-
counts, net of effect of acquisitions of
businesses:
Restricted cash......................... (113,297) -- --
Receivables, net........................ (270,007) (12,360) (30,619)
Merchandise inventory................... (886,546) (3,898) (14,102)
Other assets............................ (176,660) 783 (13,703)
Accounts payable........................ 1,247,835 (58,343) 75,603
Accrued liabilities..................... 1,129,831 183,017 50,825
Accrued payroll......................... 68,833 (4,903) 13,646
----------- --------- ----------
Net cash used in operating activities... (1,726,831) (393,890) (533,137)
----------- --------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of videocassette tapes, net of
tapes acquired in acquisitions........... (4,322,348) (202,545) (481,818)
Capital expenditures, net of acquisitions. (1,012,631) (10,438) (689,706)
Disposals of rental inventory, net........ 564,450 30,382 8,689
Disposals of equipment and leasehold im-
provements, net.......................... 290,554 107,420 --
Cash acquired in Entertainment One, Inc.
acquisition.............................. 64,235 -- --
Proceeds from disposal of assets acquired
in Entertainment One, Inc. acquisition... 1,099,714 -- --
----------- --------- ----------
Net cash used in investing activities.... (3,316,026) (75,181) (1,162,835)
----------- --------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Advances from parent...................... 7,008,935 416,422 1,540,535
Additional borrowings..................... 461,301 -- --
----------- --------- ----------
Net cash provided by financing activi-
ties.................................... 7,470,236 416,422 1,540,535
----------- --------- ----------
NET INCREASE (DECREASE) IN CASH............ 2,427,379 (52,649) (155,437)
CASH AND CASH EQUIVALENTS, beginning of
year ..................................... 66,162 118,811 274,248
----------- --------- ----------
CASH AND CASH EQUIVALENTS, end of year..... $ 2,493,541 $ 66,162 $ 118,811
=========== ========= ==========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-6
<PAGE>
BLOWOUT ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994 AND 1993
1. NATURE OF BUSINESS, FORMATION OF COMPANY AND SIGNIFICANT ACCOUNTING
POLICIES:
Nature of Business
BlowOut Entertainment, Inc. and subsidiaries (the Company), a 93 percent
owned subsidiary of Rentrak Corporation (Rentrak), is engaged in the business
of operating "store within a store" retail video outlets which rent and sell
motion picture videocassettes, video games, computer games and programs on CD-
ROMs in Wal-Mart and Wal-Mart SuperCenters, Super Kmart Centers and Ralph's
grocery stores pursuant to individual leases with each retailer. As of
December 31, 1995, the Company operated 123 stores in Wal-Mart and Wal-Mart
SuperCenters, and 25 stores in Super Kmart Centers under the name "BlowOut
Video" and 4 stores in Ralph's grocery stores under the name "Videos and
More."
Formation of Company
In April 1996, Rentrak consolidated the businesses and operations of three
direct or indirect wholly owned subsidiaries to form the Company. Prior
thereto, Rentrak operated its wholly owned "store within a store" retail video
outlets through those subsidiaries.
In July 1992, Rentrak formed SVI, Inc. (SVI) to operate "store within a
store" retail video outlets. On August 31, 1995, Rentrak formed W-One
Incorporated (W- 1) and K-One Incorporated (K-1) to facilitate the acquisition
of Supercenter Entertainment Corporation (SCE). On the same date, Rentrak
acquired the Wal-Mart and Kmart "store within a store" retail video operations
from SCE. As part of the acquisition, the leases, pursuant to which SCE
operated the Wal-Mart and Kmart stores, were assigned to W-1 and K-1,
respectively. Effective September 1, 1995, Rentrak assigned to W-1, as a
capital contribution, all of the former SEC assets and liabilities related to
the operations of its Wal-Mart stores, and Rentrak assigned to K-1, as a
capital contribution, all of the former SEC assets and liabilities related to
the operation of its Kmart stores.
To effect the consolidation of the Company, in March 1996 Rentrak
contributed all of the outstanding capital stock of W-1 and K-1 to a wholly
owned subsidiary of Rentrak, which then contributed the stock of W-1 and K-1
to SVI as a capital contribution. W-1 and K-1 then became wholly owned
subsidiaries of SVI. Following this contribution, SVI changed its name to
BlowOut Entertainment, Inc. and increased the authorized capital stock to
11,000,000 shares, of which 10,000,000 shares were authorized for issuance as
common stock and 1,000,000 shares were authorized for issuance as preferred
stock.
Between July 1994 and December 1995, Rentrak and a wholly owned subsidiary
acquired 92.6 percent of the issued and outstanding common stock of
Entertainment One, Inc. (E-1), with the remaining 7.4 percent of E-1's common
stock being held by persons unrelated to Rentrak.
In May 1996, the Company acquired all of E-1's tangible and intangible
assets and assumed all of its liabilities in exchange for shares of its common
stock. Following such sale of assets, E-1 will dissolve and liquidate its
assets pursuant to a Plan of Liquidation that provides for the distribution of
the Company shares to Rentrak and the remaining stockholders on a basis such
that, as a result, Rentrak and the remaining stockholders, as a group, own 93
percent and 7 percent, respectively, of the issued and outstanding common
stock of the Company.
The above reorganization was accounted for as a reorganization of entities
under common control, restating the Company's financial statements similar to
accounting for a pooling of interests and reflecting the elimination of all
intercompany transactions (see Note 2).
F-7
<PAGE>
BLOWOUT ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995, 1994 AND 1993
Operations and Subsequent Financing
To meet its growth objectives, the Company expects to invest up to $10
million during the current year to finance store expansion and purchase
merchandise and rental inventory. Without this financing, growth objectives
will need to be scaled back accordingly.
Subsequent to year-end, the Company signed Convertible Exchangeable
Subordinated Promissory Notes (the "Notes") with two investors, obtaining $1
million from each of the investors for a total of $2 million. Both of the
investors are members of Rentrak's Board of Directors. The Notes are payable
on August 31, 1997 and bear interest at 9 percent, payable quarterly. Upon
maturity, if a public market for the Company's shares exists, the investors
have the option to convert the Notes into shares of common stock of the
Company at a conversion price equal to 80 percent of the average daily closing
price per share measured over the 15 consecutive trading day period ending on
the trading date next preceding the maturity date. In addition, if the
Company's shares become publicly traded, the Company has the option to convert
the Notes into shares of common stock at any time, using the same pricing
formula discussed above.
The Company needs additional financing to accomplish its current business
plan. The Company plans to negotiate lines of credit with financial
institutions to obtain the balance of its working capital needs. However, if
additional funding sources are necessary, Rentrak has agreed to guarantee up
to $5 million of additional financing to the Company which may require Rentrak
to renegotiate its line of credit. Rentrak has also agreed to provide extended
payment terms to the Company for fees incurred under the revenue sharing
agreement between Rentrak and the Company (see Note 8).
The Company is highly dependent on its relationships with Wal-Mart and
Kmart. There can be no assurance that Wal-Mart or Kmart will open additional
stores in locations which are commercially viable for retail operations.
Management Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents are defined as short-term highly liquid
investments with original maturities of three months or less.
Restricted cash maintained at South Trust Bank of Alabama, N.A. represents
funds held in escrow. The original balance of $110,000 was deposited in June
1995 and earns interest at a variable rate. The Company may withdraw the
balance in June 1996.
Financial Instruments
A financial instrument is cash or a contract that imposes or conveys, a
contractual obligation or right, to deliver, or receive, cash or another
financial instrument. The fair value of all material financial instruments
approximated their carrying values at December 31, 1995 and 1994.
F-8
<PAGE>
BLOWOUT ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995, 1994 AND 1993
Merchandise Inventory
Merchandise inventories, consisting primarily of previously viewed
videocassettes, are stated at the lower of cost or market. Cost is determined
using the last three months rolling average of purchases which approximates
the first-in, first-out method.
Videocassette Rental Inventory
Videocassettes purchased for basic stock rental use are stated at cost and
amortized straight line over 36 months with a provision for a $6 salvage
value. The amortization methods used reflect the anticipated revenue stream.
Accordingly, new release videocassettes purchased for more than $20 per tape
are amortized straight-line to $15 per tape over the first four months, then
to a $6 salvage value over the next 32 months. New release videocassettes
purchased for less than $20 per tape are amortized straight-line to $8 per
tape over the first four months, then to a $6 salvage value over the next 32
months.
Since 1992, the Company has obtained new release titles under a revenue
sharing agreement with Rentrak. Under this agreement, Rentrak provides the
Company with videocassettes released by certain studios. Pursuant to the
agreement, if Rentrak carries a particular new release the Company is
obligated, if it elects to offer that release at its stores, to obtain all of
its copies of that release from Rentrak. The Company pays and capitalizes a
handling fee of $8 to $10 for each videocassette. The handling fee per
videocassette is amortized on a straight-line basis over 36 months to a $6
salvage value. During the revenue sharing period, which does not exceed two
years, the studio owns the videocassette, and the rental revenue is shared by
the studio, Rentrak and the Company on a predetermined basis. Subsequent to
year-end, this agreement was amended and extended (see Note 8).
The Company may sell excess copies of a video title obtained from Rentrak
and share the sale proceeds with Rentrak and the studio on a predetermined
basis. At the end of the revenue sharing period for a title, the Company may
purchase remaining copies of that title in the Company's inventory, generally
for less than $5 per copy.
At December 31, 1995 and 1994, the Company's videocassette rental inventory
consists of the following:
<TABLE>
<CAPTION>
1995 1994
---------- --------
<S> <C> <C>
Cost.................................................... $7,152,838 $611,978
Less--Accumulated amortization.......................... 1,437,745 288,599
---------- --------
Videocassette rental inventory, net..................... $5,715,093 $323,379
========== ========
</TABLE>
As videocassette rental inventory is sold or retired, the applicable cost
and accumulated amortization are eliminated from the accounts and any related
gain or loss is recognized through cost of rental and product sales.
Equipment and Leasehold Improvements
Equipment and leasehold improvements are stated at cost. Depreciation is
provided on a straight-line basis over the estimated useful life. The
following table represents the estimated useful life of each category of fixed
asset:
<TABLE>
<S> <C>
Leasehold improvements......................................... 5 years
Furniture and fixtures......................................... 5 years
Computers...................................................... 3-5 years
Equipment and vending machines................................. 3-5 years
</TABLE>
F-9
<PAGE>
BLOWOUT ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995, 1994 AND 1993
Expenditures for repairs and maintenance are charged to current operations,
and costs related to renewals and improvements that add significantly to the
useful life of an asset are capitalized. When depreciable properties are
retired or otherwise disposed of, the cost and related depreciation are
removed from the accounts and the resulting gain or loss is reflected in
income.
Intangible Assets
As a result of the SCE and E-1 acquisitions, the Company has recorded
intangible assets consisting of goodwill and favorable lease contracts. The
goodwill of approximately $1,656,300 is amortized by the straight-line basis
over 15 years. The Company believes this useful life is appropriate based on
the factors influencing acquisition decisions. These factors include location
of stores, profitability and general industry outlook. The favorable lease
contract of approximately $3,500,000 is being amortized over the term of the
lease, 10 years.
The Company reviews its intangible assets for asset impairment at the end of
each quarter, or more frequently when events or changes in circumstances
indicate that the carrying amount of intangibles may not be recoverable. To
perform that review, the Company will estimate the sum of expected future
undiscounted cash flows from operating activities. If the estimated net cash
flows are less than the carrying amount of intangibles, the Company would
recognize an impairment loss in an amount necessary to write the intangibles
down to fair value as determined by the expected discounted future cash flows.
Income Taxes
For income tax return purposes, the Company is included in the consolidated
tax return of Rentrak. The current and deferred taxes in the accompanying
financial statements approximate what the income taxes would have been on a
separate tax return basis.
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS
109). Under the liability method specified by SFAS 109, deferred tax assets
and liabilities are determined based on the temporary differences between the
financial statement basis and tax basis of assets and liabilities as measured
by the enacted tax rates for the years in which the taxes are expected to be
paid.
Revenue Recognition
Revenue is recognized at the time of rental or sale of the videocassettes.
Advertising Expense
Advertising expense, net of cooperative advertising reimbursements, totaled
$432,627, $33,183 and $23,652 for the years ended December 31, 1995, 1994 and
1993, respectively.
Store Opening Costs
Store opening costs, which consist of payroll, advertising and supplies are
expensed as incurred.
Per Share Data
Loss per share is computed based on the weighted average number of common
shares outstanding during the periods presented. All per share amounts have
been retroactively adjusted for the effect of a 1.01491-for-1 stock dividend
approved by the Company's board of directors on October 9, 1996 (see Note 7).
F-10
<PAGE>
BLOWOUT ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995, 1994 AND 1993
Statement of Cash Flows
The Company made the following cash payments for the years ended December
31:
<TABLE>
<CAPTION>
1995 1994 1993
-------- ----- -----
<S> <C> <C> <C>
Interest................................................... $ 44,316 $ -- $ --
</TABLE>
Noncash investing and financing activities are as follows:
<TABLE>
<CAPTION>
1995 1994 1993
---------- ----- -------
<S> <C> <C> <C>
Acquisition of E-1 as contribution from Parent........ $4,378,260 $ -- $ --
Acquisition of SCE as contribution from Parent........ 5,213,125 -- --
Conversion of borrowings and accrued interest due to
Parent to equity..................................... 6,525,815 -- --
Capital contributed by Parent......................... -- -- 350,000
</TABLE>
Recent Pronouncements
During March 1995, the Financial Accounting Standards Board issued Statement
No. 121 (SFAS 121), "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed of," which requires the Company to review
for impairment of long-lived assets, certain identifiable intangibles, and
goodwill related to those assets whenever events or changes in circumstances
indicate that the carrying amount of an asset might not be recoverable. In
certain situations, an impairment loss would be recognized. SFAS 121 will
become effective for the Company's year ending December 31, 1996. The Company
has studied the implications of SFAS 121 and, based on its initial evaluation,
does not expect it to have a material impact on the Company's financial
condition or results of operations.
During October 1995, the Financial Accounting Standards Board issued
Statement No. 123 (SFAS 123), "Accounting for Stock-Based Compensation," which
establishes a fair value-based method of accounting for stock-based
compensation plans and requires additional disclosures for those companies
that elect not to adopt the new method of accounting. The Company will
continue to account for employee purchase rights and stock options under APB
Opinion No. 25, "Accounting for Stock Issued to Employees." SFAS 123
disclosures will be effective for fiscal years beginning after December 31,
1995.
2.ACQUISITIONS:
As noted in Note 1, Rentrak consolidated the businesses and operations of
SVI, SEC, and E-1. This reorganization was accounted for as entities under
common control, restating the Company's financial statements similar to
accounting for a pooling of interests. Accordingly, the acquisitions of E-1
and SEC by Rentrak, as described below, are reflected in these financial
statements.
E-1 Acquisition
On August 31, 1994, Rentrak acquired 169,230 newly issued shares of common
stock of E-1 valued at $338,460 in lieu of a financing fee associated with
$1,700,000 of financing provided by Rentrak to E-1. On December 1, 1994,
Rentrak acquired 500,000 newly issued shares of common stock in E-1 at $2.00
per share. Following the acquisition, Rentrak owned approximately 9.6 percent
of the outstanding shares of E-1. On May 26, 1995, Rentrak purchased 3,200,000
shares of common stock of E-1 from an E-1 stockholder at $.004 per share.
Following the acquisition, Rentrak owned approximately 57 percent of the
outstanding shares of E-1.
F-11
<PAGE>
BLOWOUT ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995, 1994 AND 1993
In connection with this acquisition, the five "stand-alone" video stores
owned by E-1 were sold in June 1995 for approximately $1,100,000. These assets
were valued at their net realizable value when allocating the purchase price
to the assets acquired and liabilities assumed.
On October 20, 1995, Rentrak purchased from E-1 $985,591 principal amount of
convertible debentures, all of which were converted into 13,798,275 shares of
common stock of E-1 on December 15, 1995. Also on December 15, 1995, Rentrak
converted a $2 million line of credit that it had provided to E-1 into
28,000,000 shares of common stock of E-1. Following these transactions,
Rentrak owned 93 percent of the outstanding shares of E-1.
The results of operations of the acquired stores have been included in the
results of operations of the Company for the seven-month period ended December
31, 1995.
SCE Acquisition
On August 31, 1995, Rentrak acquired certain assets and assumed certain
liabilities of SCE which constituted the Wal-Mart and K-Mart "store within a
store" video retail operations of SCE.
The total cost of the SCE acquisition of $5.2 million was provided by
issuing 878,000 shares of Rentrak common stock with an aggregate market value
of approximately $5.2 million.
The results of operations of the acquired stores are included in the results
of operations of the Company for the four-month period ended December 31,
1995.
The purchase method of accounting was used to record both the E-1 and SCE
acquisitions.
The following table presents the unaudited pro forma results of operations
for the years ended December 31, 1995 and 1994 as if the E-1 acquisition and
the SCE acquisition had occurred at the beginning of the respective periods.
These pro forma results have been prepared for comparative purposes only and
do not purport to be indicative of what would have occurred had the
acquisitions been made at the beginning of the respective periods or of
results which may occur in the future.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------
1995 1994
----------- -----------
(UNAUDITED)
<S> <C> <C>
Revenue............................................ $17,727,476 $ 6,092,995
Net loss........................................... (8,255,722) (4,384,855)
Net loss per common share.......................... (4.52) (2.44)
</TABLE>
3.EQUIPMENT AND LEASEHOLD IMPROVEMENTS:
Equipment and leasehold improvements as of December 31, 1995 and 1994,
consist of:
<TABLE>
<CAPTION>
1995 1994
---------- ---------
<S> <C> <C>
Leasehold improvements................................ $ 360,254 $ 345,083
Furniture, fixtures and computers..................... 3,615,869 305,397
---------- ---------
Total................................................ 3,976,123 650,480
Less--Accumulated depreciation........................ (494,815) (226,135)
---------- ---------
Equipment and leasehold improvements, net............ $3,481,308 $ 424,345
========== =========
</TABLE>
F-12
<PAGE>
BLOWOUT ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995, 1994 AND 1993
Maintenance and repair expenditures are expensed as incurred and amounted to
$36,481, $10,017 and $414 for the years ended December 31, 1995, 1994 and 1993,
respectively.
4.LONG-TERM DEBT:
Long-term debt as of December 31, 1995:
<TABLE>
<S> <C>
Note payable to Ingram Entertainment, due May 1998, imputed interest
at 11.00%............................................................ $287,973
Note payable to JD Store Equipment, Inc., due May 1998, imputed inter-
est at 11.00%........................................................ 203,411
Mortgage payable to Crossroads Bank, due January 1997, bearing
interest at 8.00%,
secured by building.................................................. 154,854
Note payable to Movies 4 Sale, due June 1997, imputed interest at
11.00%............................................................... 107,038
Note payable to Softplay, due July 1996, bearing interest at 24.00%... 67,105
Note payable to Star Video, due May 1998, imputed interest at 11.00%.. 50,625
Note payable to Sight & Sound, due May 1998, imputed interest at
11.00%............................................................... 45,088
Notes payable to Ford Motor Company, due December 1998, bearing
interest at 2.90%,
secured by vehicle................................................... 19,538
Note payable to Illinois Consolidated, due June 1999, bearing interest
at 14.7%............................................................. 17,693
Note payable to shareholder, due January 1996......................... 12,800
Note payable to Ford Motor Company, due January 1996, bearing interest
at 8.75%,
secured by vehicle................................................... 951
--------
Total long-term debt................................................ 967,076
Current portion of long-term debt..................................... 326,287
--------
Long-term debt, less current portion.................................. $640,789
========
</TABLE>
Principal payments on long-term debt as of December 31, 1995 are as follows:
<TABLE>
<S> <C>
1996............................................................ $326,287
1997............................................................ 407,229
1998............................................................ 228,460
1999............................................................ 5,100
--------
$967,076
========
</TABLE>
F-13
<PAGE>
BLOWOUT ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995, 1994 AND 1993
5.COMMITMENTS AND CONTINGENCIES:
The Company leases its office and retail facilities under operating leases,
the majority of which contain renewal options.
The Company's office facilities are operated under operating leases.
Subsequent to year-end, the Company entered into an eleven-year lease
agreement with Rentrak. Through December 31, 1996, rental payments under this
agreement are calculated as 3.71 percent of all of Rentrak's expenses of
occupying their facility. Beginning January 1, 1997, the Company has a fixed
monthly payment. Future minimum lease payments required under leases as of
December 31, 1995, including the agreement with Rentrak as described above,
are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
-----------
<S> <C>
1996......................................................... $ 14,000
1997......................................................... 42,584
1998......................................................... 42,584
1999......................................................... 42,584
2000......................................................... 42,584
Thereafter................................................... 273,546
--------
Total lease payments....................................... $457,882
========
</TABLE>
As discussed in Note 1, the majority of the Company's retail facilities are
operated under master lease agreements with Wal-Mart and Kmart. Each of these
master leases provides for an initial five-year term for each new store, with
an additional five-year optional renewal term.
Rental expense for the Wal-Mart, Kmart and Ralph's locations is computed as
a percentage of retail store revenue plus additional charges for maintenance,
property taxes and other common area charges.
Lease expense was $1,167,827, $120,014 and $99,452 and included $1,071,032,
$94,543 and $57,211 of rents based on retail store revenues for the years
ended December 31, 1995, 1994 and 1993, respectively.
Under the Wal-Mart lease, either the Company or Wal-Mart can elect to
terminate the lease with respect to stores which fail to generate a minimum
level of revenues. Currently, substantially all of the Company's stores are
operating in excess of the minimum revenue requirement.
Also under the Wal-Mart lease, all assets of the Company are pledged to
secure payment of all rentals due to Wal-Mart.
6.INCOME TAXES:
The reconciliation of the statutory federal income tax rate to the Company's
effective income tax rate is as follows:
<TABLE>
<CAPTION>
1995 1994 1993
------ ------ ------
<S> <C> <C> <C>
Benefit computed at statutory rates.................. (34.0)% (34.0)% (34.0)%
Change in valuation allowance........................ 33.8 33.7 33.5
Other................................................ .2 .3 .5
------ ------ ------
-- % -- % -- %
====== ====== ======
</TABLE>
F-14
<PAGE>
BLOWOUT ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995, 1994 AND 1993
Deferred tax assets at December 31, 1995 and 1994 consist of the following:
<TABLE>
<CAPTION>
1995 1994
---------- --------
<S> <C> <C>
Deferred tax assets--
Current:
Inventory reserve.................................... $ 4,167 $ 4,807
Vacation accrual..................................... 6,720 --
---------- --------
Total current deferred tax assets................... 10,887 4,807
Noncurrent:
Depreciation......................................... 185,873 34,872
Amortization of intangible assets.................... 919,144 --
Net operating loss carryforward...................... 1,228,597 678,033
---------- --------
Total noncurrent deferred tax assets................ 2,333,614 712,905
Valuation allowance................................... (2,344,501) (717,712)
---------- --------
Total deferred tax assets, net of valuation allow-
ance............................................... $ -- $ --
========== ========
</TABLE>
The increase in the valuation allowance during the years ended December 31,
1995, 1994 and 1993 was $1,626,789, $317,932 and $322,700, respectively.
Due to the uncertainty of future income, the Company has provided a
valuation allowance for the entire amount of the deferred tax asset.
At December 31, 1995, for federal tax return reporting purposes, the Company
has approximately $3,233,000 of tax loss carryovers that expire at various
dates through 2010.
7.STOCKHOLDERS' EQUITY:
In December 1995, Rentrak contributed intercompany payables and accrued
interest due from the Company to Rentrak of $6,520,690 as a capital
contribution to the Company.
Stock Dividend
On October 9, 1996, the Company's board of Directors approved a 1.01491-for-
1 stock dividend for all stockholders of record as of October 9, 1996. All per
share amounts for all periods in the Company's financial statements have been
retroactively adjusted for the effect of the stock dividend.
8.RELATED PARTY TRANSACTIONS:
The Company receives certain administrative support services from Rentrak,
including administration of benefits and insurance programs, computer system
support, and cash management. The statements of operations include costs and
expenses for the Company's allocated share from Rentrak. Such allocated costs
were $138,593 $140,532 and $102,401 for 1995, 1994 and 1993, respectively.
As noted in Note 1, the Company entered into a revenue sharing agreement
with Rentrak on December 9, 1992, which was amended and extended on March 15,
1996.
Under the agreement, Rentrak provides a portion of the videocassette rental
inventory to each of the Company's stores and in return, the Company pays a
fixed "handling fee" for each cassette and a "transaction fee" each time a
Rentrak cassette is rented. Also, the Company is required to use Rentrak
approved computer
F-15
<PAGE>
BLOWOUT ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995, 1994 AND 1993
hardware as well as specific point-of-sale software for purposes of monitoring
Rentrak related transactions. Under the terms of the amended agreement, the
Company, for a period of 20 years, must obtain from Rentrak a sufficient
volume of rental priced feature film video titles necessary to cause the
Company to pay Rentrak transaction and handling fee payments for each calendar
year equal to at least 11 percent of the Company's gross rental revenues.
The Company's cost of sales related to handling, transaction and sell-
through charges from Rentrak was $2,730,620, $144,499 and $72,812 for the
years ended December 31, 1995, 1994 and 1993, respectively.
Subsequent to year-end, the Company entered into a 20-year license agreement
with Rentrak granting the Company a nonexclusive, nontransferable license to
use the service mark "BlowOut Video." In consideration for this right, the
Company must pay to Rentrak a 1.667 percent royalty, not to exceed 20 percent
of the Company's income before taxes.
As discussed in Note 1, subsequent to year-end two members of Rentrak's
Board of Directors loaned the Company a total of $2 million in exchange for
Convertible Exchangeable Subordinated Promissory Notes.
As indicated in the statements of cash flows, Rentrak has provided
significant advances to the Company to fund ongoing operations. Interest
expense related to advances and other borrowings from Rentrak was $433,189,
$161,700 and $50,825 for the years ended December 31, 1995, 1994 and 1993,
respectively, and is included in the accompanying statement of operations.
The payable to Parent balances of $2,800,000 and $1,671,166 as of December
31, 1995 and 1994, respectively, also relate to advances provided by Rentrak.
The payable to Parent balance of $2,800,000 as of December 31, 1995 is the
remaining balance of advances payable to Parent after contribution of
$6,525,815 of advances, payables and accrued interest to equity in December
1995, as discussed above. This amount is due in March 1999 and bears interest
at 9 percent.
Rentrak has guaranteed the Company's liabilities to a major video tape
supplier for video tape purchases made by E-1 stores.
9.LITIGATION:
The Company has several legal actions pending incidental to the ordinary
course of business. In the opinion of management, the expected outcome of
these matters in the aggregate will not have a material adverse effect on the
financial position or results of operations of the Company.
10.SUBSEQUENT EVENTS:
Subsequent to year-end, the Company's Board of Directors approved an Equity
Participation Plan. This plan authorizes up to 500,000 shares to be issued to
employees and directors. The plan will be administered by the Compensation
Committee of the Board of Directors, which will have the authority to approve
the issuance of nonqualified and incentive stock options subject to the
requirements of the plan.
Refer to Note 1 for discussion of the Notes issued by the Company subsequent
to year-end.
F-16
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Supercenter Entertainment Corporation--
Retail Division:
We have audited the accompanying balance sheets of Supercenter Entertainment
Corporation--Retail Division as of December 31, 1994, 1993, and 1992, and the
related statements of operations for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Supercenter Entertainment
Corporation--Retail Division as of December 31, 1994, 1993, and 1992, and the
results of its operations for the years then ended, in conformity with
generally accepted accounting principles.
/s/ Arthur Andersen LLP
Arthur Andersen LLP
Dallas, Texas,
October 16, 1995
F-17
<PAGE>
SUPERCENTER ENTERTAINMENT CORPORATION--RETAIL DIVISION
BALANCE SHEETS--DECEMBER 31, 1994, 1993, AND 1992
ASSETS
<TABLE>
<CAPTION>
1994 1993 1992
---------- -------- --------
<S> <C> <C> <C>
CURRENT ASSETS:
Cash.............................................. $ 151,431 $ 43,260 $ 53,802
Receivables....................................... 7,667 -- 100
Merchandise inventories........................... 322,686 34,434 3,510
Other current assets.............................. 83,081 8,856 9,679
---------- -------- --------
Total current assets............................ 564,865 86,550 67,091
RENTAL INVENTORIES, net........................... 1,410,230 292,994 209,064
PROPERTY AND EQUIPMENT, net....................... 1,555,294 151,289 87,252
OTHER ASSETS...................................... 15,391 -- --
---------- -------- --------
Total assets.................................... $3,545,780 $530,833 $363,407
========== ======== ========
LIABILITIES AND EQUITY
CURRENT LIABILITIES:
Accounts payable.................................. $ 947,061 $117,745 $ 39,198
Accrued expenses.................................. 321,256 14,535 10,688
---------- -------- --------
Total current liabilities....................... 1,268,317 132,280 49,886
COMMITMENTS
EQUITY............................................ 2,277,463 398,553 313,521
---------- -------- --------
Total liabilities and equity.................... $3,545,780 $530,833 $363,407
========== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-18
<PAGE>
SUPERCENTER ENTERTAINMENT CORPORATION--RETAIL DIVISION
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993, AND 1992
<TABLE>
<CAPTION>
1994 1993 1992
----------- --------- --------
<S> <C> <C> <C>
REVENUES:
Rental revenue, net......................... $ 2,954,640 $ 539,764 $ 69,093
Product sales............................... 498,281 211,382 7,267
----------- --------- --------
3,452,921 751,146 76,360
OPERATING COSTS AND EXPENSES:
Cost of product sales....................... 1,535,853 329,010 13,702
Selling and administrative.................. 4,176,476 847,853 157,198
----------- --------- --------
OPERATING LOSS............................... (2,259,408) (425,717) (94,540)
INTEREST (INCOME) EXPENSE.................... 3,766 32 (90)
----------- --------- --------
LOSS BEFORE INCOME TAXES..................... (2,263,174) (425,749) (94,450)
PROVISION FOR INCOME TAXES................... -- -- --
----------- --------- --------
NET LOSS..................................... $(2,263,174) $(425,749) $(94,450)
=========== ========= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-19
<PAGE>
SUPERCENTER ENTERTAINMENT CORPORATION--RETAIL DIVISION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994 AND 1993
1.GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
General
The accompanying financial statements relate to the accounts of the retail
division (retail video centers located in Kmart and Wal-Mart) of Supercenter
Entertainment Corporation (the "Retail Division"). Supercenter Entertainment
Corporation (the "Company") was incorporated in December 1991 and operated
under the name CEVAXS U.S. Corporation through August 1994, at which time the
name was changed to Supercenter Entertainment Corporation. From December 1991
through October 1992, the Company's sole operation was in wholesale video
services to the supermarket industry. Beginning in October 1992, the Company
expanded its operation to include Company-owned retail video centers located
in stores owned by Wal-Mart Stores, Inc. In early 1994, the Company expanded
its host retailer relationships to include Kmart Corporation.
At December 31, 1994, 1993, and 1992, the Retail Division had 56, 7, and 3
locations, respectively.
Revenue Recognition
Revenues are recognized at the time of rental or sale of video cassettes.
Merchandise Inventories
Merchandise inventories consist of prerecorded video cassettes and games and
are stated at the lower of cost or market; cost is determined on the first-in,
first-out method.
Rental Inventories
Rental inventories are stated at the lower of amortized cost or market and
consist of prerecorded video cassettes classified as new release, catalog
stock, and video games. New release video cassettes are amortized over ten
months using a declining percentage basis to a $6 salvage value. Catalog stock
video cassettes are amortized over 36 months on a straight-line basis to a $6
salvage value. Video games are amortized over 24 months on a straight-line
basis to an $8 salvage value.
Property and Equipment
Property and equipment is stated at cost. Depreciation is calculated using
the straight-line method based on the estimated useful lives of the assets.
Leasehold improvements are amortized on a straight-line method over the
shorter of the estimated useful lives or the respective lease terms. The
estimated useful lives are as follows:
<TABLE>
<S> <C>
Furniture and fixtures.......................................... 5 years
Computer equipment.............................................. 3 years
Leasehold improvements.......................................... 3 years
</TABLE>
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
basis. Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the year in which those temporary
differences are expected to be reversed or settled. The effect on deferred
taxes of a change in tax rates is recognized in income in the period that
includes the enactment date.
F-20
<PAGE>
SUPERCENTER ENTERTAINMENT CORPORATION--RETAIL DIVISION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995, 1994 AND 1993
2.RENTAL INVENTORIES:
Rental inventories at December 31, 1994, 1993, and 1992, consisted of the
following:
<TABLE>
<CAPTION>
1994 1993 1992
---------- -------- --------
<S> <C> <C> <C>
New release video cassettes.................. $1,036,162 $211,334 $ 15,470
Catalog stock video cassettes................ 578,796 82,054 201,588
Video games.................................. 503,490 44,493 --
---------- -------- --------
2,118,448 337,881 217,058
Less--Accumulated amortization............... (708,218) (44,887) (7,994)
---------- -------- --------
$1,410,230 $292,994 $209,064
========== ======== ========
</TABLE>
The Company maintained a centralized warehouse to process inventory for all
of the Company's operations, including the Retail Division. Included in the
above rental inventory amounts for 1994 is $68,538 of rental inventory which
was located in the Company's warehouse at year-end and allocated to the Retail
Division based upon the pro rata portion of inventory subsequently shipped to
the Retail Division. At December 31, 1993 and 1992, no inventory in the
Company's warehouse was allocated to the Retail Division due to the amount
being insignificant.
3.PROPERTY AND EQUIPMENT:
Property and equipment at December 31, 1994, 1993, and 1992, consisted of
the following:
<TABLE>
<CAPTION>
1994 1993 1992
---------- -------- --------
<S> <C> <C> <C>
Furniture and fixtures...................... $ 976,618 $122,861 $ 50,595
Computer equipment.......................... 619,323 89,020 49,198
Leasehold improvements...................... 240,264 -- --
---------- -------- --------
1,836,205 211,881 99,793
Less--Accumulated depreciation and amortiza-
tion....................................... (280,911) (60,592) (12,541)
---------- -------- --------
$1,555,294 $151,289 $ 87,252
========== ======== ========
</TABLE>
4.INCOME TAXES:
The Company and the Retail Division have had cumulative losses since
inception. Also, as discussed further in Note 9, the assets of the Retail
Division have been sold subsequent to year-end. All differences between the
financial statement carrying amount and the tax basis in these assets prior to
the sale are eliminated at the time of the sale. Due to the above and the lack
of earnings history for the Retail Division, no current or deferred taxes have
been reflected in the accompanying financial statements.
F-21
<PAGE>
SUPERCENTER ENTERTAINMENT CORPORATION--RETAIL DIVISION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995, 1994 AND 1993
5.EQUITY:
Equity represents the sole shareholder's net investment in the Retail
Division. The following table reflects the activity in the equity account for
the three years ended December 31, 1994:
<TABLE>
<S> <C>
Owner investments.............................................. $ 407,971
Losses......................................................... (94,450)
-----------
Equity, December 31, 1992....................................... 313,521
Owner investments.............................................. 1,272,469
Transfers to owner............................................. (761,688)
Losses......................................................... (425,749)
-----------
Equity, December 31, 1993....................................... 398,553
Owner investments.............................................. 7,479,167
Transfers to owner............................................. (3,337,083)
Losses......................................................... (2,263,174)
-----------
Equity, December 31, 1994....................................... $ 2,277,463
===========
</TABLE>
6.CORPORATE ALLOCATIONS:
As discussed in Note 1, the accompanying financial statements relate to the
Retail Division of the Company. The Retail Division shares common corporate
functions/activities with the rest of the Company. The corporate costs
primarily include general management, finance, data processing, logistics, and
marketing. Corporate costs have been allocated to the Retail Division based
upon the relation of Retail Division net revenues to total Company net
revenues. Management believes this allocation method is reasonable and
reflects the utilization of corporate costs. The allocation percentages and
allocated costs for the Retail Division were 61% and $977,381 in 1994, 18% and
$179,487 in 1993, and 4% and $42,823 in 1992. All allocated corporate costs
are included in selling and administrative expenses in the accompanying
financial statements.
7.RELATED-PARTY TRANSACTIONS:
The sole shareholder of the Company funds the operations of the Company and
is closely involved in the daily activities of the Company. The sole
shareholder does not draw a salary for his services, and the accompanying
balance sheet does not include any amounts owing to the sole shareholder.
A substantial portion of the Retail Division's purchases and other
transactions are made by the Company on behalf of the Retail Division.
In August 1994, the sole shareholder of the Company sold his 100% ownership
in a company which is one of the Retail Division's major vendors. Subsequent
to the sale and until August 1995, the Company had a revenue sharing
arrangement with this vendor whereby it leased video cassettes from the vendor
for a six-month term for an up-front payment of up to $10 per unit. The video
cassettes were rented by the Company to customers and the rental revenues
generated were distributed evenly between the Company and the vendor. The
Company had an option to purchase the video cassettes for $8 per unit at the
conclusion of the lease term. Amounts due to this vendor and included in
accounts payable at December 31, 1994, 1993, and 1992, are $370,710, $19,703,
and $34,162, respectively.
F-22
<PAGE>
SUPERCENTER ENTERTAINMENT CORPORATION--RETAIL DIVISION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995, 1994 AND 1993
8.LEASES:
The Company has several noncancelable operating leases, primarily for the
rental of its retail video center locations. The leases are typically for an
initial five-year term and one five-year renewal option exercisable by the
Company, subject to the fulfillment of certain conditions.
Future minimum lease payments under noncancelable operating leases for the
Retail Division as of December 31, 1994, are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
------------
<S> <C>
1995......................................................... $1,617,000
1996......................................................... 1,655,000
1997......................................................... 1,600,000
1998......................................................... 1,496,000
1999......................................................... 877,000
----------
Total future minimum lease payments.......................... $7,245,000
==========
</TABLE>
Rent expense for the Retail Division was $793,910, $135,290, and $27,260 for
the years ended December 31, 1994, 1993, and 1992.
9.SUBSEQUENT EVENTS:
On August 31, 1995, substantially all of the Retail Division's assets were
purchased by Rentrak Corporation. The sole shareholder received 878,000 shares
of Rentrak Corporation's common stock as consideration for the acquisition.
F-23
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To BlowOut Entertainment, Inc.:
We have audited the accompanying statements of assets and liabilities of The
Wal-Mart Stores Business of Entertainment One, Inc. (the Business) as of July
31, 1994 and 1993, and the related statements of revenues and expenses for the
year ended July 31, 1994, and the 10 months ended July 31, 1993. These
financial statements are the responsibility of Entertainment One's management.
Our responsibility is to express an opinion on these financial statements
based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
The statements have been prepared as a presentation of the continuing
business of Entertainment One and are not intended to be a complete
presentation of the Business' financial position and cash flows.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the assets and liabilities of the Business as of
July 31, 1994 and 1993, and the revenues and expenses for the year ended July
31, 1994, and the 10 month period ended July 31, 1993, in conformity with
generally accepted accounting principles.
/s/ Arthur Andersen LL_______________P
Arthur Andersen LLP
Portland, Oregon,
April 19, 1996
F-24
<PAGE>
THE WAL-MART STORES
BUSINESS OF ENTERTAINMENT ONE, INC.
STATEMENTS OF ASSETS AND LIABILITIES AS OF JULY 31, 1994 AND 1993
<TABLE>
<CAPTION>
1994 1993
---------- --------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash...................................................... $ 50,131 $ 3,565
Other assets.............................................. -- 13,599
Merchandise inventory..................................... 3,812 220
---------- --------
Total current assets..................................... 53,943 17,384
VIDEOCASSETTE INVENTORY, net............................... 602,213 60,824
PROPERTY, PLANT AND EQUIPMENT, net......................... 400,841 153,585
---------- --------
Total assets............................................. $1,056,997 $231,793
========== ========
LIABILITIES
CURRENT LIABILITIES:
Trade accounts payable.................................... $ 526,701 $158,518
Current portion of long-term debt......................... 214,051 119,134
Accrued payroll and other................................. 42,527 --
---------- --------
Total current liabilities................................ 783,279 277,652
LONG-TERM DEBT............................................. 1,008,465 280,819
---------- --------
Total liabilities........................................ 1,791,744 558,471
---------- --------
Net liabilities.......................................... $ 734,747 $326,678
========== ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-25
<PAGE>
THE WAL-MART STORES
BUSINESS OF ENTERTAINMENT ONE, INC.
STATEMENTS OF REVENUES AND EXPENSES
FOR THE YEAR ENDED JULY 31, 1994, AND THE
10 MONTHS ENDED JULY 31, 1993
<TABLE>
<CAPTION>
1994 1993
---------- --------
<S> <C> <C>
NET SALES.................................................. $ 913,431 $255,874
COST OF SALES.............................................. 331,600 55,128
---------- --------
Gross margin............................................. 581,831 200,746
SELLING AND GENERAL ADMINISTRATIVE EXPENSES................ 1,183,700 363,512
---------- --------
Net loss................................................. $ 601,869 $162,766
========== ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-26
<PAGE>
THE WAL-MART STORES
BUSINESS OF ENTERTAINMENT ONE, INC.
NOTES TO STATEMENTS OF ASSETS AND LIABILITIES
AND STATEMENTS OF REVENUE AND EXPENSES
JULY 31, 1994 AND 1993
1.BASIS OF PRESENTATION:
C&M Video, Inc. (C&M), the wholly owned subsidiary of Entertainment One,
Inc. (the Company), was founded in 1983. Entertainment One, Inc. was
incorporated in June of 1994 and serves as the parent company for C&M and
future related business ventures. Since its establishment, C&M has offered
retail entertainment services such as rental and sale of VCR equipment,
videocassettes and video game cartridges. C&M has retail stores located in
Wal-Mart stores and supercenters as well as several locations operating as
stand-alone entities. At July 31, 1994, C&M operated 16 Wal-Mart locations and
5 stand-alone locations.
The accompanying statements of assets and liabilities and statements of
revenue and expenses relate to the accounts of The Wal-Mart Stores Business of
Entertainment One, Inc. (the Business).
The Business' financial information was derived from the historical books
and records of The Wal-Mart Stores Business of Entertainment One, Inc., and
represent assets and liabilities, and revenue and expenses of the Business.
The historical operating results may not be indicative of the results of the
Business on a separate basis.
The Business shares common corporate functions/activities with the rest of
the Company. The corporate costs primarily include general management,
finance, data processing, logistics and marketing. Corporate costs have been
allocated to the Business based primarily upon the relationship of the
Business' net revenues to total net revenues. Management believes that
allocation methods are reasonable and reflects the utilization of corporate
costs. The allocation percentage and allocated costs for the Business were 31%
and $421,306 in 1994, and 10% and $96,786 in 1993. All allocated corporate
costs were included in selling and administrative expenses in the accompanying
statements. Corporate debt was allocated based on the ratio of the Company
stores open during each of the respective years to total stores.
The Business is highly dependent on its relationship with Wal-Mart. There
can be no assurance that Wal-Mart will open additional stores in locations
which are commercially viable for retail operations.
2.RENTRAK ACQUISITION AND SUBSEQUENT REORGANIZATION:
On August 31, 1994, Rentrak Corporation (Rentrak) acquired 169,230 newly
issued shares of common stock of the Company valued at $338,460 in lieu of a
financing fee associated with $1,700,000 of financing provided by Rentrak to
the Company. On December 1, 1994, Rentrak acquired 500,000 newly issued shares
of common stock in the Company at $2.00 per share. Following the acquisition,
Rentrak owned approximately 9.6% of the outstanding shares of the Company. On
May 26, 1995, Rentrak purchased 3,200,000 shares of common stock of the
Company from a company stockholder at $.004 per share. Following the
acquisition, Rentrak owned approximately 57% of the outstanding shares of the
Company.
On October 20, 1995, Rentrak purchased from the Company $985,591 principal
amount of convertible debentures, all of which were converted into 13,798,275
shares of common stock of the Company on December 15, 1995. Also on December
15, 1995, Rentrak converted a $2 million line of credit that it had provided
to the Company into 28,000,000 shares of common stock of the Company.
Following these transactions, Rentrak owned 92.6% of the outstanding shares of
the Company.
F-27
<PAGE>
THE WAL-MART STORES
BUSINESS OF ENTERTAINMENT ONE, INC.
NOTES TO STATEMENTS OF ASSETS AND LIABILITIES
AND STATEMENTS OF REVENUE AND EXPENSES--(CONTINUED)
JULY 31, 1994 AND 1993
In May 1996, Rentrak contributed its interest in the Company to one of its
wholly owned subsidiaries, BlowOut Entertainment, Inc. (BlowOut). Rentrak also
contributed its interest in two of its other wholly owned subsidiaries to
BlowOut. Following this reorganization, Rentrak owned 93.0% of BlowOut. The
minority shareholders of the Company obtained, in the aggregate, a 7.0%
ownership interest in BlowOut.
3.SIGNIFICANT ACCOUNTING POLICIES:
Videocassette Rental Inventory
The Company classifies videocassette rental inventory into three categories,
the classification depends on the quantity of cassettes a store has of a
particular title. Each classification is amortized at a different rate.
The first three cassettes of a particular title in each store are considered
additions to their base stock and are amortized over 36 months at a straight-
line rate. The next six cassettes of the same title are considered new
releases and are amortized at an accelerated rate over 36 months. Finally, if
a store has more than nine cassettes, the title is considered a "hit" and the
remaining videotapes are amortized over nine months on a straight-line basis.
The Company's Videocassette Rental Inventory consists of the following:
<TABLE>
<CAPTION>
1994 1993
--------- --------
<S> <C> <C>
Cost.................................................... $ 904,170 $105,705
Less--Accumulated amortization.......................... (301,957) (44,881)
--------- --------
Videocassette inventory, net.......................... $ 602,213 $ 60,824
========= ========
</TABLE>
Property, Plant and Equipment
Property, plant and equipment are recorded at cost and depreciation is
provided on a straight-line basis using the estimated useful life. The
following table represents the estimated useful life of each category of fixed
asset:
<TABLE>
<S> <C>
Leasehold improvements....................................... 5-10 years
Furniture and fixtures....................................... 5-7 years
Computers.................................................... 5 years
Automobiles.................................................. 3-5 years
</TABLE>
Management Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
F-28
<PAGE>
THE WAL-MART STORES
BUSINESS OF ENTERTAINMENT ONE, INC.
NOTES TO STATEMENTS OF ASSETS AND LIABILITIES
AND STATEMENTS OF REVENUE AND EXPENSES--(CONTINUED)
JULY 31, 1994 AND 1993
4.PROPERTY, PLANT AND EQUIPMENT, NET:
Property, plant and equipment, net, consists of:
<TABLE>
<CAPTION>
1994 1993
--------- --------
<S> <C> <C>
Leasehold improvements.................................. $ 11,441 $ 13,922
Furniture, fixtures and computers....................... 441,669 123,641
Automobiles............................................. 72,355 40,262
--------- --------
Total................................................. 525,465 177,825
Less--Accumulated depreciation.......................... (124,624) (24,240)
--------- --------
Property, plant and equipment, net...................... $ 400,841 $153,585
========= ========
</TABLE>
5.OPERATING LEASES:
The Business leases substantially all of its retail distribution and
administration facilities under noncancelable leases. These leases expire at
various times through the year 1999. Future minimum payments under these
operating leases are as follows:
<TABLE>
<CAPTION>
YEAR ENDING JULY 31:
--------------------
<S> <C>
1995............................................................ $471,858
1996............................................................ 450,795
1997............................................................ 418,634
1998............................................................ 373,806
1999............................................................ 118,869
</TABLE>
6.LONG-TERM DEBT:
<TABLE>
<CAPTION>
1994 1993
---------- --------
<S> <C> <C>
Central Bank (SBA Loan bearing a 10% interest rate)..... $ 883,793 $ --
Crossroads Bank (various loans bearing interest rates
ranging from 8% to 8.75%).............................. 380,833 342,031
Dieterich First National Bank (loan bearing a 10% inter-
est rate).............................................. 202,936 153,966
Westfield State Bank (loan bearing an 8% interest rate). 110,641 20,000
Miscellaneous debt (bearing interest rates ranging from
7% to 8.75%)........................................... 137,183 10,922
---------- --------
Total debt............................................ 1,715,386 526,919
Less--Allocated to C&M.................................. 492,870 126,966
---------- --------
Allocated to the Business............................. 1,222,516 399,953
Less--Current portion................................... 214,051 119,134
---------- --------
Total long-term debt.................................. $1,008,465 $280,819
========== ========
</TABLE>
F-29
<PAGE>
THE WAL-MART STORES
BUSINESS OF ENTERTAINMENT ONE, INC.
NOTES TO STATEMENTS OF ASSETS AND LIABILITIES
AND STATEMENTS OF REVENUE AND EXPENSES--(CONTINUED)
JULY 31, 1994 AND 1993
Corporate debt was allocated based on the ratio of the Company stores open
during each of the respective years to total stores. Management believes this
allocation method is reasonable.
Scheduled maturities of long-term debt for the year ending July 31, 1994:
<TABLE>
<S> <C>
1995.......................................................... $ 214,051
1996.......................................................... 201,467
1997.......................................................... 184,789
1998.......................................................... 90,304
1999.......................................................... 87,972
Thereafter.................................................... 443,933
----------
$1,222,516
==========
</TABLE>
The debt is secured by inventories, buildings and certain fixed assets.
7.INCOME TAXES:
The Company and the Business have had cumulative losses since inception.
Also, as discussed further in Note 2, the assets and liabilities of the
Business have been sold subsequent to year-end. Due to the above circumstances
and the lack of earnings history for the Business, no current or deferred
taxes have been reflected in the accompanying financial statements.
8.RELATED-PARTY TRANSACTIONS:
The Company entered into an agreement with Rentrak on June 11, 1994, where
the Company has agreed to use Rentrak's PPT (pay-per-transaction) System.
Rentrak provides a portion of the videocassette rental inventory to each of
the Company's stores and in return, the Company pays a fixed "handling fee"
for each cassette and a "transaction fee" each time a Rentrak cassette is
rented. Also, the Company is required to use Rentrak approved computer
hardware as well as specific point-of-sale software for purposes of monitoring
Rentrak related transactions.
F-30
<PAGE>
BLOWOUT ENTERTAINMENT, INC.
CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 1996 AND DECEMBER 31, 1995
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996 DECEMBER 31, 1995
------------------ -----------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
ASSETS
Cash and Cash Equivalents................ $ 4,006,313 $ 2,606,838
Accounts and Notes Receivable............ 112,448 341,909
Prepaid Expenses......................... 44,856 --
Merchandise Videocassette Inventory...... 2,351,482 984,894
Other Current Assets..................... 185,934 244,426
------------ -----------
Total Current Assets.................... 6,701,033 4,178,067
Rental Inventory......................... 12,826,568 7,152,838
Less: Accumulated Depreciation........... (4,816,168) (1,437,745)
------------ -----------
Rental Inventory, net................... 8,010,400 5,715,093
Leaseholds, Fixtures and Equipment....... 5,733,131 3,976,123
Construction in Progress................. 121,718 --
------------ -----------
5,854,849 3,976,123
Less: Accumulated Depreciation........... (1,268,970) (494,815)
------------ -----------
Property, net........................... 4,585,879 3,481,308
Intangible Assets, net................... 4,575,587 4,896,092
Other Assets............................. 185,622 265,935
------------ -----------
Total Assets............................ $ 24,058,521 $18,536,495
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Portion of Long Term Debt........ $ 899,171 $ 326,287
Line of Credit........................... 2,509,932 --
Accounts Payable......................... 3,670,675 3,278,553
Accrued Liabilities...................... 786,925 1,217,893
Accrued Payroll.......................... 450,852 178,310
Interest Payable......................... 1,369 --
Payable to Rentrak....................... 1,081,385 --
------------ -----------
Total Current Liabilities............... 9,400,309 5,001,043
Note Payable to Rentrak.................. 2,800,000 2,800,000
Other Long Term Debt..................... 1,123,267 640,789
------------ -----------
Total Long Term Debt.................... 3,923,267 3,440,789
Common Stock, par value $.01 per share;
10,000,000 shares authorized; 2,433,551
and 1,826,838 issued and outstanding re-
spectively.............................. 24,336 18,268
Preferred Stock, par value $.01 per
share; 1,000,000 shares authorized;
no shares issued and outstanding........ -- --
Additional Paid in Capital............... 21,947,864 16,973,932
Accumulated Deficit...................... (11,237,255) (6,897,537)
------------ -----------
Total Stockholders' Equity............... 10,734,945 10,094,663
------------ -----------
Total Liabilities and Stockholders' Eq-
uity................................... $ 24,058,521 $18,536,495
============ ===========
</TABLE>
F-31
<PAGE>
BLOWOUT ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTH PERIODS ENDED SEPTEMBER 30, 1996 AND 1995
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
-----------------------
1996 1995
----------- ----------
(UNAUDITED)
<S> <C> <C>
REVENUE:
Rental revenue....................................... $ 6,116,392 $2,513,832
Product sales........................................ 1,817,868 599,850
----------- ----------
Total Revenue....................................... 7,934,260 3,113,682
OPERATING COSTS AND EXPENSES:
Cost of product sales................................ 3,300,289 1,473,391
Operating expenses................................... 4,542,245 2,082,030
Selling, general and administrative.................. 757,971 470,258
----------- ----------
Total Operating Costs and Expenses.................. 8,600,505 4,025,679
OPERATING LOSS........................................ (666,245) (911,997)
----------- ----------
NONOPERATING (INCOME) EXPENSE:
Interest income...................................... (6,813) --
Interest expense..................................... 132,999 57,627
Other, net........................................... 946,920 (2,294)
----------- ----------
Total nonoperating (income)/expense................. 1,073,106 55,333
LOSS BEFORE INCOME TAXES.............................. (1,739,351) (967,330)
INCOME TAX PROVISION.................................. -- --
----------- ----------
NET LOSS.............................................. $(1,739,351) $ (967,330)
=========== ==========
LOSS PER SHARE........................................ $ (0.86) $ (.53)
=========== ==========
SHARES USED IN PER SHARE CALCULATION.................. 2,024,679 1,826,838
=========== ==========
</TABLE>
F-32
<PAGE>
BLOWOUT ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 1996 AND 1995
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------
1996 1995
----------- -----------
(UNAUDITED)
<S> <C> <C>
REVENUE:
Rental revenue...................................... $17,386,228 $ 3,543,390
Product sales....................................... 4,698,913 827,024
----------- -----------
Total Revenue...................................... 22,085,141 4,370,414
OPERATING COSTS AND EXPENSES:
Cost of product sales............................... 9,774,161 2,312,757
Operating expenses.................................. 12,660,906 2,893,678
Selling, general and administrative................. 2,752,309 967,440
----------- -----------
Total Operating Costs and Expense.................. 25,187,376 6,173,875
OPERATING LOSS....................................... 3,102,235 1,803,461
----------- -----------
NONOPERATING (INCOME) EXPENSE:
Interest income..................................... (6,813) --
Interest expense.................................... 344,683 110,468
Other, net.......................................... 893,443 (68,477)
----------- -----------
Total nonoperating (income)/expense................ 1,231,313 41,991
LOSS BEFORE INCOME TAXES............................. (4,333,548) (1,845,452)
INCOME TAX PROVISION................................. 12,299 --
----------- -----------
NET LOSS............................................. $(4,345,847) $(1,845,452)
=========== ===========
LOSS PER SHARE....................................... $ (2.30) $ (1.40)
=========== ===========
SHARES USED IN PER SHARE CALCULATION................. 1,893,266 1,321,613
=========== ===========
</TABLE>
F-33
<PAGE>
BLOWOUT ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 1996 AND 1995
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------
1996 1995
----------- ------------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.......................................... $(4,345,847) $ (1,845,452)
Adjustments to reconcile net loss to net cash used
in operating activities--
Loss on disposal of assets........................ 124,943 --
Amortization of video cassette rental inventory... 3,758,480 1,409,574
Depreciation...................................... 839,523 266,233
Amortization of intangible and other assets....... 400,817 17,084
Changes in assets and liabilities accounts:
Receivables...................................... 229,461 (59,674)
Merchandise inventory............................ (1,366,586) (757,821)
Prepaids......................................... 13,636 (91,269)
Accounts payable................................. 1,473,507 315,828
Accrued liabilities.............................. (429,599) 114,393
Accrued payroll.................................. 272,542 166,809
----------- ------------
Net cash provided by (used in) operating activi-
ties............................................ 970,877 (464,295)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of video cassette tapes, net............ (6,053,788) (2,119,026)
Capital expenditures.............................. (2,062,923) (363,213)
Proceeds from sale of assets...................... -- 1,105,747
Other Assets...................................... -- (94,524)
----------- ------------
Net cash (used in) provided by operating activi-
ties............................................ (8,116,711) (1,471,016)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of common stock................ 4,980,000 --
Additional borrowings............................. 3,565,309 2,605,862
----------- ------------
Net cash provided by financing activities........ 8,545,309 2,605,862
NET DECREASE IN CASH............................... 1,399,475 670,551
----------- ------------
CASH AND CASH EQUIVALENTS, beginning of period..... 2,606,838 66,162
CASH AND CASH EQUIVALENTS, end of period........... $ 4,006,313 $ 736,713
=========== ============
</TABLE>
F-34
<PAGE>
BLOWOUT ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE A: BASIS OF PRESENTATION
The accompanying consolidated financial statements of BlowOut Entertainment,
Inc., and subsidiaries ("BlowOut" or the "Company") for the three and nine
month periods ended September 30, 1995 and September 30, 1996 are unaudited
and, in the opinion of management, contain all adjustments that are of a
normal and recurring nature necessary to present fairly the financial position
and results of operations for such periods. The consolidated financial
statements should be read in conjunction with the consolidated financial
statements and related notes contained in the Company's audited consolidated
financial statements for the year ended December 31, 1995. The results of
operations for the three and nine month periods ended September 30, 1996 are
not necessarily indicative of the results expected for the full year.
NOTE B: DISTRIBUTION
In June, 1996 the Company's principal stockholder, Rentrak Corporation
("Rentrak"), announced that it intends to distribute shares of Common Stock of
the Company to shareholders through a special dividend (the "Distribution").
Shareholders of Rentrak will receive one share in the Company for every 8.34
shares held in Rentrak on the applicable record date. The distribution is
conditioned upon, among other things, declaration of the special dividend by
Rentrak's board of directors. Once these conditions are met, the special
dividend is expected to be distributed during the fourth quarter of 1996.
NOTE C: STOCK SPLIT
On October 9, 1996, the Board of Directors of the Company authorized a
1.01491-for-1 split of the Company's Common Stock. The stock split was
effected by a distribution of .01491 additional shares for each share owned by
stockholders of record on the record date established by the Board. Share and
per share amounts presented in the consolidated financial statements and
related notes have been restated to reflect the stock split.
NOTE D: NET LOSS PER SHARE
For the three and nine months periods ended September 30, 1995 and 1996, net
loss per share of common stock is computed on the basis of the weighted
average shares of common stock outstanding.
NOTE E: FINANCING
Phoenix Credit Facility
By agreement dated as of July 23, 1996, Phoenix Leasing Incorporated
("Phoenix") agreed to provide to the Company a credit facility (the "Phoenix
Facility") in an aggregate principal amount of $2.0 million for a five-year
term. Amounts outstanding under the Phoenix Facility will bear interest at a
fixed rate per annum equal to 13.98%. The proceeds of the Phoenix Facility are
to be used to construct and open (including acquisition of inventory) new
Company stores in Wal-Mart Stores and Wal-Mart SuperCenters. The Phoenix
Facility is secured by (i) a continuing guaranty of Rentrak (which Phoenix, in
its sole discretion, may release once at least 36 payments of amounts
outstanding under the Phoenix Facility have been made or the Company's
financial condition is, in Phoenix's sole opinion, sufficient to justify such
release), and (ii) the Company's grant of a first continuing security interest
in all assets at each location to be financed with funds from the Phoenix
Facility. Under the Phoenix Facility, the Company cannot borrow more than
$100,000 per store location, with a minimum draw of $30,000 per store
location. See "Rentrak Guarantee." As of September 30, 1996, the Company had
borrowed $962,700 under the Phoenix Facility.
F-35
<PAGE>
BLOWOUT ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
CBC Facility
In August 1996, Coast Business Credit ("CBC") agreed to provide to the
Company a revolving line of credit (the "CBC Line of Credit") in the maximum
principal amount at one time outstanding of $5.0 million. Under the CBC Line
of Credit, the Company may only draw up to 80% of the Orderly Liquidation
Value (as defined by the CBC Line of Credit) of eligible new and used video
cassette inventory. Advances under the CBC Line of Credit will bear interest
at a floating rate per annum equal to the Bank of America Reference Rate plus
2.75% (11% as of September 30, 1996). The term of the CBC Line of Credit is
three years. The CBC Line of Credit will be guaranteed by Rentrak until the
Company is "spun- off" to the shareholders of Rentrak and the shares of
BlowOut Common Stock are publicly traded (i.e., the completion of the
Distribution); thereafter, Rentrak has agreed, under certain circumstances in
the event of default under the CBC Line of Credit, to repurchase BlowOut's
video cassette inventory at specified amounts. See "Rentrak Guarantee." As of
September 30, 1996, the Company had borrowed $2.51 million under the CBC Line
of Credit.
Notes
In March and April 1996, the Company issued $1.0 million in convertible
subordinated notes to each of Mr. Bill LeVine and to Culture Convenience Club,
Ltd. ("CCC"), a Japanese corporation of which Mr. Muneaki Masuda is President
and Chairman (the "Notes"). Messrs. LeVine and Masuda are Directors of the
Company. These Notes were guaranteed by Rentrak, accrued interest at a rate of
9.0% per annum, and had a maturity date of August 31, 1997. On August 30,
1996, each of Mr. LeVine and CCC converted their Notes into 121,789 shares of
BlowOut Common Stock.
CCC Stock Purchase
On August 30, 1996, CCC purchased 362,931 shares of BlowOut Common Stock for
$2,980,000 in cash in a private placement.
Rentrak Guarantee
On June 26, 1996, the Company entered into an agreement with Rentrak
pursuant to which Rentrak, on the terms and subject to the conditions
contained in such agreement, will guarantee up to $12.0 million in
indebtedness of the Company ("Rentrak Guarantee"). As of the date hereof, the
Rentrak Board has authorized Rentrak to guarantee $7.0 million under the
Rentrak Guarantee. The obligation of Rentrak to issue such guarantee is
subject to a number of conditions such as being current on all monetary
obligations owed to Rentrak and being in compliance with all agreements
between Rentrak and the Company. The Rentrak Guarantee expires on the earlier
of (i) December 31, 1997 or (ii) such time as the total indebtedness of the
Company subject to the Rentrak Guarantee is equal to $12.0 million. Under the
Rentrak Guarantee, the Company must maintain $12.0 million of key man
insurance on the Company's President, Steve Berns. Rentrak may terminate its
obligation to issue new guarantees on 30-days' prior written notice to the
Company. The Company can also terminate such agreement on 30 days' prior
written notice, provided that the Company provides evidence that all
indebtedness subject to the Rentrak Guarantee has been paid off and the
Company obtains an unconditional release of Rentrak. The Company has also
agreed that (i) during the term of the agreement, as long as any Rentrak
Guarantee is outstanding and for 24 months thereafter, the Company will not
convey any of its stores to a third party unless such third party agrees to
assume and be bound by the PPT Agreement and the License Agreement, and
(ii) during the term of the agreement or as long as any Rentrak Guarantee is
outstanding, the Company will pay all amounts received from a sale or closure
of a store either to: (a) finance new Company stores or (b) to pay down
indebtedness subject to the Rentrak Guarantee. During the term of the
Agreement, and/or as long as any Rentrak Guarantee is outstanding, the Company
shall pay Rentrak a weekly fee at a rate equal to .02% per week of then-
currently outstanding indebtedness subject to a Rentrak Guarantee.
F-36
<PAGE>
BLOWOUT ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
Rentrak has agreed to guarantee amounts outstanding under the Phoenix
Facility and the CBC Line of Credit up to an aggregate of $7.0 million. After
the Distribution, Rentrak will have a continuing monetary guaranty for amounts
outstanding under the Phoenix Facility. After the Distribution, Rentrak has
agreed, under certain circumstances in the event of a default under the credit
facility with CBC, to repurchase BlowOut's video cassette inventory in an
amount not to exceed the lesser of the amount owed under the CBC facility or
$5.0 million. Rentrak is also guaranteeing certain trade payables of the
Company and amounts owed under promissory notes to certain of the Company's
suppliers. At September 30, 1996, the total amount of obligations of the
Company subject to the Rentrak Guarantee was approximately $3.5 million.
NOTE E: Major Suppliers
For the quarter ended September 30, 1996, BlowOut had three video cassette
distributors who supplied 41.0%, 27.3% and 12.2% of total tape purchases. For
the nine months ended September 30, 1996, BlowOut had three video cassette
distributors who supplied 39.7%, 29.2% and 11.8% of total tape purchases. No
other distributors provided more than 10% of the total tape purchases for
either the three months or nine months ended September 30, 1996.
For the quarter ended September 30, 1995, BlowOut had three video cassette
distributors who supplied 28.7%, 24.3% and 22.1% of total tape purchases. For
the nine months ended September 30, 1995, BlowOut had three video cassette
distributors who supplied 41.1% and 31.5% of total tape purchases. No other
distributors provided more than 10% of the total tape purchases for either the
three months or nine months ended September 30, 1995.
F-37
<PAGE>
BLOWOUT ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
UNAUDITED PRO FORMA COMBINED CONSOLIDATED FINANCIAL DATA
Introduction
The following pro forma combined consolidated statements of operations for
the period ended December 31, 1995 give effect to the acquisition of SCE and
E-1 as if the acquisitions had occurred on January 1, 1995. Such pro forma
data have been prepared utilizing the separate historical consolidated
financial statements of BlowOut, the SCE Business and E-1 which are included
elsewhere in this Information Statement and should be read herewith in their
entirety, including the notes thereto. The following pro forma data are
provided for illustrative purposes only and are not necessarily indicative of
the operating results or financial condition that would have occurred if the
BlowOut Consolidation had been consummated during such historical periods, nor
is such data necessarily indicative of BlowOut's future operating results or
financial condition. No pro forma balance sheet has been presented as the
BlowOut Consolidation is already reflected in the audited December 31, 1995
balance sheet included elsewhere in this Information Statement. Similarly,
neither a pro forma statement of operations for the nine month period ended
September 30, 1996 sheet nor a pro forma balance sheet as of September 30,
1996 has been presented as the BlowOut Consolidation is already reflected in
the unaudited statement of operations and balance sheet included elsewhere in
this Information Statement.
The Company had considered the need for pro forma adjustments for the
effects of the Distribution as if it occurred on January 1, 1995 and has
concluded that no such adjustments are necessary for the following reasons:
(1) Payments pursuant to the Royalty Agreement are contingent on the Company's
net income level and, as the Company does not anticipating having net income
through at least 1996, a pro forma adjustment for this item would not be
appropriate; (2) Payments pursuant to the Rentrak Guarantee Agreement are not
material, and (3) Other items resulting from ongoing agreements between the
Company and Rentrak (such as rent expense and administrative costs) are
already reflected in the Company's historical financial statements.
The pro forma financial data are based on the purchase method of accounting
for asset acquisitions with BlowOut as the acquiring entity as defined by
generally accepted accounting principles. Under this method of accounting, the
recorded values of BlowOut's assets and liabilities have been combined with
the estimated fair values of E-1's assets and liabilities at the consummation
of the BlowOut Consolidation.
Income taxes have not been provided for in the accompanying pro forma
combined consolidated statements of operations as the entities being
consolidated did not report combined income from operations during 1995, and
any tax benefit applicable to future periods was assumed to be fully reserved.
The number of shares outstanding for purposes of the pro forma earnings per
share calculation was computed as though shares issued in connection with the
acquisition of E-1 were issued on January 1, 1995 and were outstanding for the
entire year.
See "The Company--History of the Company" for a more detailed description of
the formation of the Company and the acquisition of the SCE Business and E-1.
F-38
<PAGE>
BLOWOUT ENTERTAINMENT, INC.
UNAUDITED PRO FORMA COMBINED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995
The following table sets forth the unaudited pro forma statement of
operations for the fiscal year ended December 31, 1995 for BlowOut (formerly
known as SVI, Inc.), and E-1 as if the SCE and E-1 acquisitions occurred on
January 1, 1995.
<TABLE>
<CAPTION>
BLOWOUT
SVI K-1 AND W-1 E-1 ENTERTAINMENT
---------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
REVENUE
Rental Revenue............ $ 968,111 $ 6,470,470 $ 5,582,163 $13,020,744
Product and Other Sales... 162,215 2,322,873 2,221,644 4,706,732
---------- ----------- ----------- -----------
Total Revenue............ 1,130,326 8,793,343 7,803,807 17,727,476
OPERATING COSTS AND EXPENSE
Cost of revenue........... 447,908 4,240,961 4,441,801 9,130,670
Operating expenses........ 622,880 5,656,314 5,087,456 11,366,650
Selling, general and ad-
ministration............. 247,413 884,732 3,594,288 4,726,433
---------- ----------- ----------- -----------
Total Operating Costs and
Expense................. 1,318,201 10,782,007 13,123,545 25,223,753
LOSS FROM OPERATIONS....... (187,875) (1,988,664) (5,319,738) (7,496,277)
---------- ----------- ----------- -----------
OTHER INCOME (EXPENSE)
Interest Income........... -- -- 1,133 1,133
Interest Expense.......... (174,000) (15,759) (181,636) (371,395)
Other, net................ (267,326) (145,813) 23,956 (389,183)
---------- ----------- ----------- -----------
Total other income (ex-
pense).................. (441,326) (161,572) (156,547) (759,445)
LOSS BEFORE INCOME TAXES... (629,201) (2,150,236) (5,476,285) (8,255,722)
---------- ----------- ----------- -----------
Income Taxes............... -- -- -- --
NET LOSS................... $ (629,201) $(2,150,236) $(5,476,285) $(8,255,722)
========== =========== =========== ===========
Net loss per common share.. $ (0.70) N/A N/A $ (4.59)
========== ===========
</TABLE>
F-39
<PAGE>
HOULIHAN LOKEY HOWARD & ZUKIN
November 11, 1996
To The Board of Directors
Rentrak Corporation
Mr. Ron Berger
President and Chief Executive Officer
7227 N.E. 55th Avenue
Portland, OR 97218
Dear Directors
We understand the following regarding Rentrak Corporation ("Company" or
"Rentrak" hereinafter) and its subsidiaries. The Company's shares are publicly
traded on the NASDAQ market system. The Company's primary business is the
distribution of video cassettes to home video specialty stores. BlowOut
Entertainment Inc. ("BlowOut"), an approximately 70% owned subsidiary of the
Company, is engaged in operating retail video outlets within larger department
stores and mass merchandisers. Pro Image, Inc. ("Pro Image"), a wholly owned
subsidiary of the company, is engaged in operating retail stores which sell
professional and college licensed sports apparel and merchandise.
The Company is considering a corporate reorganization whereby:
i) shares of BlowOut will be spun off to the Company's shareholders in a
taxable transaction, (the "BlowOut Spinoff") (with Rentrak's possible
retention of up to 9.9% of BlowOut);
ii) the Company's interest in Pro Image or its successor will be disposed
of in a taxable transaction (the "Pro Image Disposition") and
iii) the Company will continue to operate its core video distribution
business through its Rentrak Home Entertainment ("RHE") division.
The BlowOut Spinoff, and the Pro Image Disposition and other related
transactions disclosed to Houlihan Lokey are referred to collectively herein
as the "Transaction."
You have requested our written opinion (the "Opinion") as to matters set
forth below. This Opinion values the Company as a going concern (including
goodwill), on a pro forma basis, immediately after and giving effect to the
BlowOut Spinoff.
For purposes of the Opinion, "fair value" shall be defined as the amount at
which the Company would change hands between a willing buyer and a willing
seller, each having reasonable knowledge of the relevant facts, neither being
under any compulsion to act, with equity to both and "present fair saleable
value" shall be defined as the amount that may be realized if the Company's
aggregate assets (including goodwill), as applicable, are sold as an entirety
with reasonable promptness in an arm's length transaction under present
conditions for the sale of comparable business enterprises, as such conditions
can be reasonably evaluated by Houlihan Lokey. We have used the same valuation
methodologies in determining fair value and present fair saleable value for
purposes of rendering this Opinion. The term "identified contingent
liabilities" shall mean the stated amount of contingent liabilities identified
to us and valued by responsible officers of the Company upon whom we will rely
without independent verification; no other contingent liabilities have been
considered. Being "able to pay its debts as they become absolute and mature
and due in the usual course of business" shall mean that, assuming the BlowOut
Spinoff has been consummated as proposed, the Company's financial forecasts
for the period ending December 31, 1996 (through December 31, 1999 indicate
positive cash flow for such period, including (and after giving effect to) the
payment of installments due under loans made pursuant to the indebtedness
incurred in the BlowOut Spinoff, as such installments are scheduled at the
close of the BlowOut Spinoff. It is
I-1
<PAGE>
Houlihan Lokey's understanding, upon which it is relying, that the Company's
Board of Directors and any other recipient of the Opinion will consult with
and rely solely upon their own legal counsel with respect to said definitions.
No representation is made herein, or directly or indirectly by the Opinion, as
to any legal matter or as to the sufficiency of said definitions for any
purpose other than setting forth the scope of Houlihan Lokey's Opinion
hereunder.
Notwithstanding the use of the defined terms "fair value" and "present fair
saleable value," we have not been engaged to identify prospective purchasers
or to ascertain the actual prices at which and terms on which the Company can
currently be sold, and we know of no such efforts by others.
Because the sale of any business enterprise involves numerous assumptions
and uncertainties, not all of which can be quantified or ascertained prior to
engaging in an actual selling effort, we express no opinion as to whether the
Company would actually be sold for the amount we believe to be its fair value
and present fair saleable value.
In connection with this Opinion, we have made such reviews, analyses and
inquiries as we have deemed necessary and appropriate under the circumstances.
Among other things, we have:
1. reviewed the Company's annual reports to shareholders and on Form 10-K
for the three fiscal years ended March 31, 1996 and quarterly reports on
Form 10-Q for the quarter ended June 30, 1996, which the Company's
management has identified as the most current information available;
2. reviewed BlowOut's audited financial statements for the three fiscal
years ended December 31, 1995 and unaudited, interim financial statements
for the period ended September 30, 1996, which BlowOut's management has
identified as the most current information available;
3. reviewed copies of the Information Statement to be distributed to
shareholders of the Company in connection with the BlowOut Spinoff as filed
with the Securities and Exchange Commission on Form 10;
4. reviewed a copy of the Information Statement and Notice of Action
Without a Meeting, dated May 28, 1996, furnished to the stockholders of
Entertainment One, Inc. in connection with the consolidation of
Entertainment One, Inc.'s retain video operations with BlowOut;
5. met with certain members of the senior management of the Company and
BlowOut to discuss the operations, financial condition, future prospects
and projected operations and performance of BlowOut, and met with
representatives of the Company's counsel to discuss certain matters;
6. met with certain members of senior management of the Company and Pro
Image to discuss the operations, financial condition, future prospects and
projected operations and performance of Pro Image, and the Pro Image
Disposition;
7. visited certain facilities and business offices of the Company and
BlowOut;
8. reviewed forecasts and projections (the "Projections") prepared by the
Company's management with respect to the Company for the years ending
December 31, 1996 through 1999 (the "Projection Period");
9. reviewed the historical market prices and trading volume for the
Company's publicly traded securities;
10. reviewed other publicly available financial data for the Company and
BlowOut and certain companies that we deem comparable to the Company and
BlowOut;
I-2
<PAGE>
11. reviewed copies of certain agreements, including, but not limited to:
i) The Senior Loan and Security Agreement dated July 23, 1996 between
BlowOut and Phoenix Leasing Incorporated,
ii) a draft of the Loan and Security Agreement between BlowOut and
Coast Business Credit dated September 12, 1996, and
iii) Subscription Agreement between Culture Convenience Club ("CCC")
and BlowOut dated August 28, 1996 regarding a $2.98 million investment
by CCC to purchase BlowOut shares; and
12. conducted such other studies, analyses and investigations as we have
deemed appropriate.
We have relied upon and assumed, without independent verification, that the
financial forecasts and Projections provided to us have been reasonably
prepared and reflect the best currently available estimates of the future
financial results and condition of the Company, and that there has been no
material adverse change in the assets, financial condition, business or
prospects of the Company since the date of the most recent financial
statements made available to us.
We have not independently verified the accuracy and completeness of the
information supplied to us with respect to the Company and BlowOut and do not
assume any responsibility with respect to it. We have not made any physical
inspection or independent appraisal of any of the properties or assets of the
Company or BlowOut. Our opinion is necessarily based on business, economic,
market and other conditions as they exist and can be evaluated by us at the
date of this letter.
In rendering this opinion, we have considered the potential financial impact
of the Pro Image Disposition, based on management's representations to us of
such potential impact.
Based upon the foregoing, and in reliance thereon, it is our opinion as of
the date of this letter that, assuming the BlowOut Spinoff has been
consummated as proposed, immediately after and giving effect to the BlowOut
Spinoff:
(a) on a pro forma basis, the fair value and present fair saleable value
of the Company's assets would exceed the Company's stated liabilities and
identified contingent liabilities;
(b) the Company should be able to pay its debts as they become absolute
and mature and due in the usual course of business; and
(c) the capital remaining in the Company after the BlowOut Spinoff would
not be unreasonably small for the business in which the Company is engaged,
as management has indicated it is now conducted and is proposed to be
conducted throughout the Projection Period following the consummation of
the BlowOut Spinoff.
This Opinion is furnished solely for your benefit and may not be relied upon
by any other person without our express, prior written consent. This Opinion
is delivered to each recipient subject to the conditions, scope of engagement,
limitations and understanding set forth in this Opinion and our engagement
letter dated August 6, 1996, and subject to the understanding that the
obligations of Houlihan Lokey in the Transaction are solely corporate
obligations, and no officer, director, employee, agent, shareholder or
controlling person of Houlihan Lokey shall be subjected to any personal
liability whatsoever to any person, nor will any such claim be asserted by or
on behalf of you or your affiliates.
HOULIHAN, LOKEY, HOWARD & ZUKIN, INC.
I-3
<PAGE>
HOULIHAN LOKEY HOWARD & ZUKIN
November 11, 1996
To The Board of Directors
BlowOut Entertainment, Inc.
Mr. Steve Berns
President
BlowOut Entertainment, Inc.
7227 N.E. 55th Avenue
Portland, OR 97218
Dear Directors
We understand the following regarding BlowOut Entertainment, Inc. ("BlowOut"
hereinafter). BlowOut, an approximately 70% owned subsidiary of Rentrak
Corporation ("Company" or "Rentrak" hereinafter), is engaged in operating
retail video outlets within larger department stores and mass merchandisers.
The Company is considering a corporate reorganization whereby shares of
BlowOut will be spun off to the Company's shareholders in a taxable
transaction, (the "BlowOut Spinoff") (with Rentrak's possible retention of up
to 9.9% of BlowOut).
The BlowOut Spinoff, and other related transactions disclosed to Houlihan
Lokey are referred to collectively herein as the "Transaction."
You have requested our written opinion (the "Opinion") as to matters set
forth below. This Opinion values BlowOut as a going concern (including
goodwill), on a pro forma basis, immediately after and giving effect to the
Transaction and the associated indebtedness.
For purposes of the Opinion, "fair value" shall be defined as the amount at
which BlowOut would change hands between a willing buyer and a willing seller,
each having reasonable knowledge of the relevant facts, neither being under
any compulsion to act, with equity to both and "present fair saleable value"
shall be defined as the amount that may be realized if BlowOut's aggregate
assets (including goodwill), as applicable, are sold as an entirety with
reasonable promptness in an arm's length transaction under present conditions
for the sale of comparable business enterprises, as such conditions can be
reasonably evaluated by Houlihan Lokey. We have used the same valuation
methodologies in determining fair value and present fair saleable value for
purposes of rendering this Opinion. The term "identified contingent
liabilities" shall mean the stated amount of contingent liabilities identified
to us and valued by responsible officers of BlowOut upon whom we will rely
without independent verification; no other contingent liabilities have been
considered. Being "able to pay its debts as they become absolute and mature
and due in the usual course of business" shall mean that, assuming the BlowOut
Spinoff has been consummated as proposed, BlowOut's financial forecasts for
the period ending December 31, 1996 (through December 31, 1999 indicate
positive cash flow for such period, including (and after giving effect to) the
payment of installments due under loans made pursuant to the indebtedness
incurred in the Transaction, as such installments are scheduled at the close
of the Transaction. It is Houlihan Lokey's understanding, upon which it is
relying, that BlowOut's Board of Directors and any other recipient of the
Opinion will consult with and rely solely upon their own legal counsel with
respect to said definitions. No representation is made herein, or directly or
indirectly by the Opinion, as to any legal matter or as to the sufficiency of
said definitions for any purpose other than setting forth the scope of
Houlihan Lokey's Opinion hereunder.
Notwithstanding the use of the defined terms "fair value" and "present fair
saleable value," we have not been engaged to identify prospective purchasers
or to ascertain the actual prices at which and terms on which BlowOut can
currently be sold, and we know of no such efforts by others. Because the sale
of any business enterprise involves numerous assumptions and uncertainties,
not all of which can be quantified or ascertained prior to engaging in an
actual selling effort, we express no opinion as to whether the BlowOut would
actually be sold for the amount we believe to be its fair value and present
fair saleable value.
I-4
<PAGE>
In connection with this Opinion, we have made such reviews, analyses and
inquiries as we have deemed necessary and appropriate under the circumstances.
Among other things, we have:
1. reviewed the Company's annual reports to shareholders and on Form 10-K
for the three fiscal years ended March 31, 1996 and quarterly reports on
Form 10-Q for the quarter ended June 30, 1996, which the Company's
management has identified as the most current information available;
2. reviewed BlowOut's audited financial statements for the three fiscal
years ended December 31, 1995 and unaudited, interim financial statements
for the nine month period ended September 30, 1996, which BlowOut's
management has identified as the most current information available;
3. reviewed copies of the Information Statement to be distributed to
shareholders of the Company in connection with the BlowOut Spinoff as filed
with the Securities and Exchange Commission on Form 10;
4. reviewed a copy of the Information Statement and Notice of Action
Without a Meeting, dated May 28, 1996, furnished to the stockholders of
Entertainment One, Inc. in connection with the consolidation of
Entertainment One, Inc.'s retain video operations with BlowOut;
5. met with certain members of the senior management of the Company and
BlowOut to discuss the operations, financial condition, future prospects
and projected operations and performance of BlowOut, and met with
representatives of the Company's counsel to discuss certain matters;
6. visited certain facilities and business offices of the Company and
BlowOut;
7. reviewed forecasts and projections (the "Projections") prepared by
BlowOut's management with respect to BlowOut for the years ending December
31, 1996 through 1999 (the "Projection Period");
8. reviewed the historical market prices and trading volume for the
Company's publicly traded securities;
9. reviewed other publicly available financial data for the Company and
BlowOut and certain companies that we deem comparable to the Company and
BlowOut;
10. reviewed copies of certain agreements, including, but not limited to:
i) The Senior Loan and Security Agreement dated July 23, 1996 between
BlowOut and Phoenix Leasing Incorporated,
ii) a draft of the Loan and Security Agreement between BlowOut and
Coast Business Credit dated September 12, 1996, and
iii) the Agreement between Culture Convenience Club ("CCC") and
BlowOut dated August 28, 1996 regarding a $2.98 million investment by
CCC to purchase BlowOut shares; and
11. conducted such other studies, analyses and investigations as we have
deemed appropriate.
We have relied upon and assumed, without independent verification, that the
financial forecasts and Projections provided to us have been reasonably
prepared and reflect the best currently available estimates of the future
financial results and condition of BlowOut, and that there has been no
material adverse change in the assets, financial condition, business or
prospects of BlowOut since the date of the most recent financial statements
made available to us.
We have not independently verified the accuracy and completeness of the
information supplied to us with respect to the Company and BlowOut and do not
assume any responsibility with respect to it. We have not made any physical
inspection or independent appraisal of any of the properties or assets of the
Company or BlowOut. Our opinion is necessarily based on business, economic,
market and other conditions as they exist and can be evaluated by us at the
date of this letter.
Based upon the foregoing, and in reliance thereon, it is our opinion as of
the date of this letter that, assuming the BlowOut Spinoff has been
consummated as proposed, immediately after and giving effect to the BlowOut
Spinoff:
I-5
<PAGE>
(a) on a pro forma basis, the fair value and present fair saleable value
of BlowOut's assets would exceed BlowOut's stated liabilities and
identified contingent liabilities;
(b) BlowOut should be able to pay its debts as they become absolute and
mature and due in the usual course of business; and
(c) the capital remaining in BlowOut after the Transaction would not be
unreasonably small for the business in which BlowOut is engaged, as
management has indicated it is now conducted and is proposed to be
conducted throughout the Projection Period following the consummation of
the Transaction.
This Opinion is furnished solely for your benefit and may not be relied upon
by any other person without our express, prior written consent. This Opinion
is delivered to each recipient subject to the conditions, scope of engagement,
limitations and understanding set forth in this Opinion and our engagement
letter dated August 6, 1996, and subject to the understanding that the
obligations of Houlihan Lokey in the Transaction are solely corporate
obligations, and no officer, director, employee, agent, shareholder or
controlling person of Houlihan Lokey shall be subjected to any personal
liability whatsoever to any person, nor will any such claim be asserted by or
on behalf of you or your affiliates.
HOULIHAN, LOKEY, HOWARD & ZUKIN, INC.
I-6
<PAGE>
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
SVI, INC.
SVI, Inc., a corporation organized and existing under the laws of the State
of Delaware, does hereby certify as follows:
First: The corporation was originally incorporated under the name SMM, Inc.
pursuant to a Certificate of Incorporation filed with the Secretary of State
of Delaware on July 6, 1992.
Second: The corporation subsequently changed its name to SVI, Inc. pursuant
to a Certificate of Amendment filed with the Secretary of State of Delaware on
July 14, 1992.
Third: This Amended and Restated Certificate of Incorporation restates,
integrates and amends the Certificate of Incorporation of the corporation, as
amended, and has been duly adopted in accordance with the provisions of
Sections 242 and 245 of the General Corporation Law of the State of Delaware
and by written consent of the stockholders pursuant to Section 228 of the
General Corporation Law of the State of Delaware.
Fourth: The text of the Certificate of Incorporation of the corporation, as
amended, is hereby further amended and restated, in full, to read as follows:
II-1
<PAGE>
ARTICLE I
The name of the corporation is:
BLOWOUT ENTERTAINMENT, INC.
ARTICLE II
The address of its registered office in the State of Delaware is 1013 Centre
Road, in the City of Wilmington, County of New Castle. The name of its
registered agent at such address is The Prentice-Hall Corporation System, Inc.
ARTICLE III
The nature of the business or purposes to be conducted or promoted is to
engage in any lawful act or activity for which corporations may be organized
under the General Corporation Law of the State of Delaware.
ARTICLE IV
The total number of shares of all classes of stock which the corporation
shall have authority to issue is Eleven Million (11,000,000), consisting of
Ten Million (10,000,000) shares of common stock, par value $.01 per share (the
"Common Stock"), and One Million (1,000,000) shares of preferred stock, par
value $.01 per share (the "Preferred Stock"). The designation, powers,
preferences and relative, participating, optional or other special rights,
including voting rights, qualifications, limitations or restrictions of the
Preferred Stock shall be established by resolution of the Board of Directors
pursuant to Section 151 of the General Corporation Law of the State of
Delaware.
ARTICLE V
The business and affairs of the corporation shall be managed by or under the
direction of the Board of Directors. The number of directors shall be fixed
from time to time by a bylaw or amendment thereof duly adopted by the Board of
Directors or by the stockholders acting in accordance with Article X herein.
ARTICLE VI
The Board of Directors shall be and is divided into three classes,
designated Class I, Class II and Class III. The number of directors in each
class shall be the whole number contained in the quotient arrived at by
dividing the authorized number of directors by three, and if a fraction is
also contained in such quotient then if such fraction is one-third ( 1/3) the
extra director shall be a member of Class III and if the fraction is two-
thirds ( 2/3) one of the extra directors shall be a member of Class III and
the other shall be a member of Class II. Each director shall serve for a term
ending on the date of the third annual meeting following the annual meeting at
which such director was elected; provided, however, that the directors
appointed in Class I shall serve for a term ending on the date of the 1996
annual meeting of stockholders, directors appointed in Class II shall serve
for a term ending on the date of the 1997 annual meeting of stockholders and
the directors appointed to Class III shall serve for a term ending on the date
of the 1998 annual meeting of stockholders.
In the event of any increase or decrease in the authorized number of
directors, (a) each director then serving as such shall nevertheless continue
as a director of the class of which he is a member until the expiration of his
current term, or his prior death, retirement, resignation or removal, and (b)
the newly created or eliminated directorships resulting from such increase or
decrease shall be apportioned by the Board of Directors to such class or
classes as shall, so far as possible, bring the number of directors in the
respective classes into conformity with the formula in this Article VI, as
applied to the new authorized number of directors.
II-2
<PAGE>
Notwithstanding any of the foregoing provisions of this Article VI, a
director shall hold office until the annual meeting of stockholders for the
year in which his or her term expires and until his or her successor is
elected and qualified or until his death, retirement, resignation or removal.
Should a vacancy occur or be created, the remaining directors (even though
less than a quorum) may fill the vacancy for the full term of the class in
which the vacancy occurs or is created.
ARTICLE VII
Elections of directors at an annual or special meeting of stockholders need
not be by written ballot unless the Bylaws of the corporation shall otherwise
provide.
ARTICLE VIII
The officers of the corporation shall be chosen in such a manner, shall hold
their offices for such terms and shall carry out such duties as are prescribed
by the Bylaws or determined by the Board of Directors, subject to the right of
the Board of Directors to remove any officer or officers at any time with or
without cause.
ARTICLE IX
A. The corporation shall indemnify to the full extent authorized or
permitted by law (as now or hereafter in effect) any person made, or
threatened to be made, a defendant or witness to any action, suit or
proceeding (whether civil or criminal or otherwise) by reason of the fact that
he/she, his/her testator or intestate, is or was a director or officer of the
corporation or by reason of the fact that such director or officer, at the
request of the corporation, is or was serving any other corporation,
partnership, joint venture, employee benefit plan or other enterprise, in any
capacity. Nothing contained herein shall affect any rights to indemnification
to which employees other than directors or officers may be entitled by law. No
amendment or repeal of this Section A of Article IX shall apply to or have any
effect on any right to indemnification provided hereunder with respect to any
acts or omissions occurring prior to such amendment or repeal.
B. No director of the corporation shall be personally liable to the
corporation or its stockholders for monetary damages for any breach of
fiduciary duty by such a director as a director. Notwithstanding the foregoing
sentence, a director shall be liable to the extent provided by applicable law
(i) for any breach of the director's duty of loyalty to the corporation or its
stockholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) pursuant to
Section 174 of the General Corporation Law of the State of Delaware, or (iv)
for any transaction from which such director derived an improper personal
benefit. No amendment to or repeal of this Section B of this Article IX shall
apply to or have any effect on the liability or alleged liability of any
director of the corporation for or with respect to any acts or omissions of
such director occurring prior to such amendment or repeal.
C. In furtherance and not in limitation of the powers conferred by statute:
(i)the corporation may purchase and maintain insurance on behalf of any
person who is or was a director, officer, employee or agent of the
corporation, or is serving at the request of the corporation as a
director, officer, employee or agent of another corporation,
partnership, joint venture, trust, employee benefit plan or other
enterprise against any liability asserted against him/her and incurred
by him/her in any such capacity, or arising out of his/her status as
such, whether or not the corporation would have the power to indemnify
him/her against such liability under the provisions of law; and
II-3
<PAGE>
(ii)the corporation may create a trust fund, grant a security interest
and/or use other means (including, without limitation, letters of
credit, surety bonds and/or other similar arrangements), as well as
enter into contracts providing indemnification to the full extent
authorized or permitted by law and including as part thereof provisions
with respect to any or all of the foregoing to ensure the payment of
such amounts as may become necessary to effect indemnification as
provided therein, or elsewhere.
ARTICLE X
In furtherance and not in limitation of the powers conferred by statute, the
Board of Directors is expressly authorized to adopt, repeal, alter, amend or
rescind the Bylaws of the corporation, unless the Bylaws shall otherwise
provide. In addition, the Bylaws of the corporation may be adopted, repealed,
altered, amended, or rescinded by the affirmative vote of stockholders owning
a majority in amount of the entire capital stock of the corporation issued and
outstanding and, entitled to vote.
ARTICLE XI
Whenever a compromise or arrangement is proposed between this corporation
and its creditors or any class of them and/or between this corporation and its
stockholders or any class of them, any court of equitable jurisdiction within
the State of Delaware may, on the application in a summary way of this
corporation or of any creditor or stockholder thereof or on the application of
any receiver or receivers appointed for this corporation under (S)291 of the
General Corporation Law of the State of Delaware or on the application of
trustees in dissolution or of any receiver or receivers appointed for this
corporation under (S)279 of the General Corporation Law of the State of
Delaware order a meeting of the creditors or class of creditors, and/or of the
stockholders or class of stockholders of this corporation, as the case may be,
to be summoned in such manner as the said court directs. If a majority in
number representing three fourths in value of the creditors or class of
creditors, and/or of the stockholders or class of stockholders of this
corporation, as the case may be, agree to any compromise or arrangement and to
any reorganization of this corporation as consequence of such compromise or
arrangement, the said compromise or arrangement and the said reorganization
shall, if sanctioned by the court to which the said application has been made,
be binding on all the creditors or class of creditors, and/or on all the
stockholders or class of stockholders, of this corporation, as the case may
be, and also on this corporation.
ARTICLE XII
The corporation reserves the right to repeal, alter, amend, or rescind any
provision contained in this Amended and Restated Certificate of Incorporation,
in the manner now or hereafter prescribed by statute, and all rights conferred
on stockholders herein are granted subject to this reservation.
IN WITNESS WHEREOF, the corporation has caused this Amended and Restated
Certificate of Incorporation to be signed by a Vice President and attested to
by its Secretary this 20th day of March 1996.
BLOWOUT ENTERTAINMENT, INC.
By: /s/ Karl Wetze_____________l
Name: Karl Wetzel
Title: Vice President
ATTEST:
/s/ Kim Co_____________________x
Secretary
II-4
<PAGE>
AMENDED AND RESTATED
BYLAWS OF
BLOWOUT ENTERTAINMENT, INC.
ARTICLE I
OFFICES
Section 1. Registered Offices. The registered office of the Corporation
shall be in the City of Wilmington, County of New Castle, State of Delaware.
Section 2. Other Offices. The Corporation may also have offices at such
other places both within and outside the State of Delaware as the Board of
Directors may from time to time determine or the business of the Corporation
may require.
ARTICLE II
MEETINGS OF STOCKHOLDERS
Section 1. Place of Meetings. Meetings of stockholders shall be held at any
place within or outside the State of Delaware designated by the Board of
Directors. In the absence of any such designation, meetings of stockholders
shall be held at the principal executive offices of the Corporation.
Section 2. Time and Business of Meetings. The annual meeting of stockholders
shall be held on such date and at such time and place as may be fixed by the
Board of Directors and stated in the notice of the meeting, for the purpose of
electing directors whose term expires at that meeting and for the transaction
of such other business as is properly brought before the meeting in accordance
with these Bylaws.
To be properly brought before the annual meeting, business must be either
(i) specified in the notice of annual meeting (or any supplement or amendment
thereto) given by or at the direction of the Board of Directors, (ii)
otherwise brought before the annual meeting by or at the direction of the
Board of Directors, or (iii) otherwise brought before the annual meeting by a
stockholder who is a stockholder of record at the time of giving of the notice
provided for in this Article II, Section 2, who shall be entitled to vote at
such meeting and who complies fully with all of the notice procedures and
other requirements set forth in this Article II, Section 2. In addition to any
other applicable requirements, for business to be properly brought before an
annual meeting by a stockholder, the stockholder must have given timely notice
thereof in writing to the Secretary of the Corporation. To be timely, a
stockholder's notice must be delivered to or mailed and received at the
principal executive offices of the Corporation, not less than sixty (60)
calendar days nor more than ninety (90) calendar days prior to the first
anniversary of the preceding year's annual meeting; provided, however, that in
the event that the date of the annual meeting is changed by more than thirty
(30) calendar days from such anniversary date, notice by the stockholder to be
timely must be so received not later than the close of business on the tenth
(10th) calendar day following the earlier of the day on which notice of the
date of the meeting was mailed or public disclosure was made. A stockholder's
notice to the Secretary of business proposed to be conducted at any annual or
special meeting of stockholders shall set forth as to each matter the
stockholder proposes to bring before the annual meeting (i) a brief
description of the business desired to be brought before the meeting and the
reasons for conducting such business at the meeting, (ii) the name and record
address of the stockholder proposing such business and the name and address of
the beneficial owner, if any, on whose behalf the proposal is made, (iii) the
class, series and number of shares of the capital stock of the Corporation
which are owned beneficially and of record by such stockholder and by the
beneficial owner, if any, on whose behalf the proposal is made, and (iv) any
material interest of the stockholder and the beneficial owner, if any, on
whose behalf the proposal is made in such business. Notwithstanding anything
in the Bylaws to the contrary, no business shall be conducted at a meeting of
stockholders except in accordance with the procedures set forth in this
Article II, Section 2. The
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officer of the Corporation presiding at a meeting of stockholders (the
"Presiding Officer") shall determine whether the proposed business is properly
brought before the meeting in accordance with the provisions of this Article
II, Section 2. If the Presiding Officer should determine that the proposed
business is not properly brought before the meeting, the Presiding Officer
shall state such determination to the meeting, whereupon any such business not
properly brought before the meeting shall not be transacted or otherwise
brought before the meeting. Notwithstanding the foregoing provisions of this
Article II, Section 2, a stockholder shall also comply with all applicable
requirements of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and the rules and regulations thereunder with respect to the matters
set forth herein.
Section 3. Quorum; Adjourned Meetings. A majority of the stock issued and
outstanding and entitled to vote at any meeting of stockholders, the holders
of which are present in person or represented by proxy, shall constitute a
quorum for the transaction of business except as otherwise provided by law, by
the Certificate of Incorporation, or by these Bylaws. A quorum, once
established, shall not be broken by the withdrawal of enough votes to leave
less than a quorum and the votes present may continue to transact business
until adjournment. If, however, such quorum shall not be present or
represented at any meeting of the stockholders, a majority of the voting stock
represented in person or by proxy may adjourn the meeting from time to time,
without notice other than announcement at the meeting, until a quorum shall be
present or represented. At such adjourned meeting at which a quorum shall be
present or represented, any business may be transacted which might have been
transacted at the meeting as originally notified. If the adjournment is for
more than thirty (30) days, or if after the adjournment a new record date is
fixed for the adjourned meeting, a notice of the adjourned meeting shall be
given to each stockholder of record entitled to vote thereat.
Section 4. Voting. When a quorum is present at any meeting for election of
directors, the vote of the holders of a majority of the stock having voting
power present in person or represented by proxy at the meeting and entitled to
vote on the subject mater shall decide any questions brought before such
meeting, unless the question is one upon which by express provisions of the
Delaware General Corporation Law, or the Certificate of Incorporation or these
Bylaws, a different vote is required in which case such express provision
shall govern and control the decision of such question; provided that
directors of the Corporation shall be elected by a plurality of the votes of
the shares present in person or represented by proxy at the meeting and
entitled to vote on the election of directors. Shares represented by proxies
that reflect, with respect to a proposal, abstentions or limited voting
authority, including "broker non- votes" (i.e., shares held by a broker or
nominee which are represented at the meeting, but with respect to which such
broker or nominee is not empowered to vote on a particular proposal or
proposals) shall be counted as shares that are present and entitled to vote
for purposes of determining the presence of a quorum. For purposes of
determining the outcome of any proposal, shares represented by such proxies
will be treated as not entitled to vote with respect to the proposal or
proposals.
At a stockholders' meeting involving the election of directors, no
stockholder shall be entitled to cumulate votes (i.e., cast for any candidate
a number of votes greater than the number of the stockholders' shares entitled
to vote on the election of directors).
Section 5. Proxies. At each meeting of the stockholders, each stockholder
having the right to vote may vote in person or may authorize another person or
persons to act for him by proxy appointed by an instrument in writing
subscribed by such stockholder and bearing a date not more than three years
prior to said meeting, unless said instrument provides for a longer period.
All proxies must be filed with the Secretary of the Corporation at the
beginning of each meeting in order to be counted in any vote at the meeting.
Each stockholder shall have one vote for each share of stock having voting
power, registered in his/her name on the books of the Corporation on the
record date set by the Board of Directors as provided in this Article II,
Section 10 hereof.
Section 6. Special Meetings. Special meetings of the stockholders, for any
purpose, or purposes, unless otherwise prescribed by statute or by the
Certificate of Incorporation, may be called by the President and shall be
called by the President or the Secretary at the request in writing of a
majority of the Board of Directors, or at the request in writing of
stockholders owning not less than ten percent (10%) of the entire capital
stock of the Corporation issued and outstanding, and entitled to vote. Such
request shall state the purpose or purposes of the
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proposed meeting and shall comply with the provisions of Article II, Section 2
hereof. Business transacted at any special meeting of stockholders shall be
limited to the purposes stated in the notice. The meeting shall be held at the
principal executive offices of the Corporation at such date and time and the
President or Secretary may fix, provided that such date is not less than ten
(10) nor more than sixty (60) calendar days after receipt of such request, and
if the meeting is not so called, the person requesting the meeting may fix the
date and time of the meeting.
Section 7. Notice of Meetings. Whenever stockholders are required or
permitted to take any action at a meeting, a written notice of the meeting
shall be given which notice shall state the place, date and hour of the
meeting, and, in the case of a special meeting, the purpose or purposes for
which the meeting is called. The written notice of any meeting shall be given
to each stockholder entitled to vote at such meeting not less than ten (10)
nor more than sixty (60) days before the date of the meeting. If mailed,
notice is given when deposited in the United States mail, postage prepaid,
directed to the stockholder at his/her address as it appears on the records of
the Corporation.
Section 8. Maintenance and Inspection of Stockholder List. The officer who
has charge of the stock ledger of the Corporation shall prepare and make, at
least ten (10) days before every meeting of stockholders, a complete list of
the stockholders entitled to vote at the meeting, arranged in alphabetical
order, and showing the address of each stockholder and the number of shares
registered in the name of each stockholder. Such list shall be open to the
examination of any stockholder, for any purpose germane to the meeting, during
ordinary business hours, for a period of at least ten (10) days prior to the
meeting, either at a place within the city where the meeting is to be held,
which place shall be specified in the notice of meeting, or, if not so
specified, at the place where the meeting is to be held. The list shall also
be produced and kept at the time and place of the meeting during the whole
time thereof, and may be inspected by any stockholder who is present.
Section 9. Stockholder Action by Written Consent Without a Meeting. Unless
otherwise provided in the Certificate of Incorporation, any action required to
be taken at any annual or special meeting of stockholders of the Corporation,
or any action which may be taken at any annual or special meeting of such
stockholders, may be taken without a meeting, without prior notice and without
a vote, if a consent or consents in writing, setting forth the action so
taken, shall be signed by the holders of outstanding stock having not less
than the minimum number of votes that would be necessary to authorize or take
such action at a meeting at which all shares entitled to vote thereon were
present and voted and shall be delivered to the Corporation by delivery to its
registered office in Delaware, to its principal place of business, or to an
officer or agent of the Corporation having custody of the book in which
proceedings of meetings of stockholders are recorded. Every written consent
shall bear the date of signature of each stockholder who signs the consent and
no written consent shall be effective to take the corporate action referred to
therein unless, within sixty (60) days of the earliest dated consent delivered
in the manner required by this Section 9 to the Corporation, written consents
signed by a sufficient number of stockholders to take action are delivered to
the Corporation by delivery to its registered office in Delaware, to its
principal place of business or to an officer or agent of the Corporation
having custody of the book in which proceedings of meetings of stockholders
are recorded. Delivery to the Corporation's registered office shall be by hand
or delivered by certified or registered mail, return receipt requested. Prompt
notice of the taking of the corporate action without a meeting by less than
unanimous written consent shall be given to those stockholders who have not
consented in writing.
Section 10. Fixing Record Date. In order that the Corporation may determine
the stockholders entitled to notice of or to vote at any meeting of the
stockholders, or any adjournment thereof, or to express consent to corporate
action in writing without a meeting, or entitled to receive payment of any
dividend or other distribution or allotment of any rights, or entitled to
exercise any rights in respect of any change, conversion or exchange of stock
or for the purpose of any other lawful action, the Board of Directors may fix
a record date which shall not be more than sixty (60) nor less than ten (10)
days before the date of such meeting, nor more than sixty (60) days prior to
any other action. A determination of stockholders of record entitled to notice
of or to vote at a meeting of stockholders shall apply to any adjournment of
the meeting; provided, however, the Board of Directors may fix a new record
date for the adjourned meeting. In order that the Corporation may determine
the
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stockholders entitled to consent to corporate action in writing without a
meeting, the Board of Directors may fix a record date, which record date shall
not precede the date upon which the resolution fixing the record date is
adopted by the Board of Directors, and which record date shall not be more
than ten (10) days after the date upon which the resolution fixing the record
date is adopted by the Board of Directors.
ARTICLE III
DIRECTORS
Section 1. Number of Directors. The Corporation's Board of Directors shall
be composed of no less than five (5) directors nor more than nine (9)
directors, the exact number to be determined from time to time by resolution
adopted by the Board of Directors; provided that the Board of Directors may be
composed of less than five (5) until vacancies are filled. The directors need
not be stockholders. Directors shall be elected to hold office for a term
expiring at the annual meeting of stockholders held in the third year
following the year of their election. Only persons who are nominated in
accordance with the following procedures shall be eligible for election as
directors. Nominations of persons for election to the Board of Directors of
the Corporation at any meeting of stockholders may be made by or at the
direction of the Board of Directors, by any committee of persons appointed by
the Board of Directors or at the meeting by any stockholder of the Corporation
who is a stockholder of record at the time of giving notice provided for in
this Article III, Section 1, who shall be entitled to vote for the election of
directors at the meeting and who complies fully with all of the notice
procedures and other requirements set forth in this Article III, Section.
Nominations by any stockholder shall be made pursuant to timely notice in
writing to the Secretary of the Corporation. To be timely, a stockholder's
notice shall be delivered to or mailed and received at the principal executive
offices of the Corporation (a) in the case of annual meeting, not less than
sixty (60) calendar days nor more than ninety (90) calendar days prior to the
first anniversary of the preceding year's annual meeting; provided, however,
that in the event that the date of the annual meeting is changed by more than
thirty (30) calendar days from such anniversary date, notice by the
stockholder to be timely must be so received not later than the close of
business on the tenth (10th) calendar day following the earlier of the day on
which notice of the date of the meeting was mailed or public disclosure was
made, and (b) in the case of a special meeting at which directors are to be
elected, not later than the earlier of (i) the close of business on the tenth
(10th) calendar day following the earlier of the day on which notice of the
date of the meeting was mailed or public disclosure was made or (ii) the close
of business on the fifth (5th) calendar day before the date of the meeting.
Such stockholder's notice to the Secretary shall set forth (i) as to each
person whom the stockholder proposes to nominate for election or reelection as
a director, (a) the name, age, business address and residence address of the
person, (b) the principal occupation or employment of the person, (c) the
class and number of shares of capital stock of the Corporation which are
beneficially owned by the person, and (d) any other information relating to
the person that is or would be required to be disclosed in solicitations for
proxies for election of directors pursuant to the Rules and Regulations of the
Securities and Exchange Commission under Section 14 of the Exchange Act
(including such person's written consent to being named in the proxy statement
as a nominee and to serving as a director if elected); and (ii) as to the
stockholder giving the notice (a) the name and record address of the
stockholder and (b) the class and number of shares of capital stock of the
Corporation which are beneficially owned by such stockholder and also which
are owned of record by such stockholder and (c) any material interest or
relationship such stockholder has in or with the proposed nominee; and (iii)
as to each beneficial owner, if any, on whose behalf the nomination is made,
(a) the name and address of such person, (b) the class and number of shares of
capital stock of the Corporation which are beneficially owned by such person
and (c) any material interest or relationship such person has in or with the
proposed nominee. The Corporation may require any proposed nominee to furnish
such other information as may reasonably be required by the Corporation to
determine the eligibility of such proposed nominee to serve as a director of
the Corporation. No person shall be eligible for election as a director of the
Corporation unless nominated in accordance with the procedures set forth
herein. The Presiding Officer shall determine whether the nomination is made
in accordance with the foregoing procedures. If the Presiding Officer should
determine that the nomination was not made in accordance with the foregoing
procedures, the Presiding Officer shall state such determination to the
meeting, whereupon any such defective nomination shall be disregarded and not
otherwise
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brought before the meeting. Notwithstanding the foregoing provisions of this
Article III, Section 1, a stockholder shall also comply with all applicable
requirements of the Exchange Act and the rules and regulations thereunder with
respect to the matters set forth herein.
Section 2. Vacancies. Vacancies on the Board of Directors by reason of
death, resignation, retirement, disqualification, removal from office, or
otherwise, and newly created directorships resulting from any increase in the
authorized number of directors may be filled by a majority of the directors
then in office, although less than a quorum, or by a sole remaining director.
If there are no directors in office, then an election of directors may be held
in the manner provided by statute. Should a vacancy occur or be created, the
director chosen to fill such vacancy shall serve for the full term of the
class in which the vacancy occurs or is created and until such director's
successor shall have been elected and qualified. In the event of any increase
or decrease in the authorized number of directors, (a) each director then
serving as such shall nevertheless continue as a director of the class of
which he/she is a member until the expiration of his/her current term, or
his/her prior death, retirement, resignation or removal, and (b) the newly
created or eliminated directorships resulting from such increase or decrease
shall be apportioned by the Board of Directors to such class or classes as
shall, so far as possible, bring the number of directors in the respective
classes into conformity with the formula set forth in the Corporation's
Certificate of Incorporation, as applied to the new authorized number of
directors. If, at the time of filling any vacancy or any newly created
directorship, the directors then in office shall constitute less than a
majority of the whole Board (as constituted immediately prior to any such
increase), the Court of Chancery may, upon application of any stockholder or
stockholders holding at least ten percent (10%) of the total number of the
shares at the time outstanding having the right to vote for such directors,
summarily order an election to be held to fill any such vacancies or newly
created directorships, or to replace the directors chosen by the directors
then in office.
Section 3. Powers. The property and business of the Corporation shall be
managed by or under the direction of its Board of Directors. In addition to
the powers and authorities by these Bylaws expressly conferred upon them, the
Board of Directors may exercise all such powers of the Corporation and do all
such lawful acts and things as are not by statute or by the Certificate of
Incorporation or by these Bylaws directed or required to be exercised or done
by the stockholders.
Section 4. Place of Meetings. The directors may hold their meetings and have
one or more offices, and keep the books of the Corporation outside of the
State of Delaware.
Section 5. Regular Meetings. Regular meetings of the Board of Directors may
be held without notice at such time and place as shall from time to time be
determined by the Board.
Section 6. Special Meetings. Special meetings of the Board of Directors may
be called by the Chairman of the Board on forty-eight (48) hours' notice to
each director, either personally or by facsimile; special meetings shall be
called by the Chairman of the Board or the Secretary in like manner and on
like notice on the written request of two directors unless the Board consists
of only one director; in which case special meetings shall be called by the
Secretary in like manner or on like notice on the written request of the sole
director.
Section 7. Quorum. At all meetings of the Board of Directors a majority of
the authorized number of directors shall be necessary and sufficient to
constitute a quorum for the transaction of business, and the vote of a
majority of the directors present at any meeting at which there is a quorum,
shall be the act of the Board of Directors, except as may be otherwise
specifically provided by statute, by the Certificate of Incorporation or by
these Bylaws. A quorum, once established, shall not be broken by the
withdrawal of enough directors to leave less than a quorum and the directors
present may continue to transact business until adjournment. If a quorum shall
not be present at any meeting of the Board of Directors the directors present
thereat may adjourn the meeting from time to time, without notice other than
announcement at the meeting, until a quorum shall be present. If only one
director is authorized, such sole director shall constitute a quorum.
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Section 8. Action Without a Meeting. Unless otherwise restricted by the
Certificate of Incorporation or these Bylaws, any action required or permitted
to be taken at any meeting of the Board of Directors or of any committee
thereof may be taken without a meeting, if all members of the Board or
committee, as the case may be, consent thereto in writing, and the writing or
writings are filed with the minutes of proceedings of the Board or committee.
Section 9. Telephonic Meetings. Unless otherwise restricted by the
Certificate of Incorporation or these Bylaws, members of the Board of
Directors, or any committee designated by the Board of Directors, may
participate in a meeting of the Board of Directors, or any committee, by means
of conference telephone or similar communications equipment by means of which
all persons participating in a meeting can hear each other, and such
participation in a meeting shall constitute presence in person at such
meeting.
Section 10. Committees of Directors. The Board of Directors may, by
resolution passed by a majority of the whole Board, designate one or more
committees, each such committee to consist of one or more of the directors of
the Corporation. The Board may designate one or more directors as alternate
members of any committee, who may replace any absent or disqualified member at
any meeting of the committee. In the absence or disqualification of a member
of a committee, the member or members thereof present at any meeting and not
disqualified from voting, whether or not he/she or they constitute a quorum,
may unanimously appoint another member of the Board of Directors to act at the
meeting in the place of any such absent or disqualified member. Any such
committee, to the extent provided in a resolution of the Board of Directors,
shall have and may exercise all the powers and authority of the Board of
Directors in the management of the business and affairs of the Corporation,
and may authorize the seal of the Corporation to be affixed to all papers
which may require it; but no such committee shall have the power or authority
in reference to amending the Certificate of Incorporation, adopting an
agreement of merger or consolidation, recommending to the stockholders the
sale, lease or exchange of all or substantially all of the Corporation's
property and assets, recommending to the stockholders a dissolution of the
Corporation or a revocation of a dissolution, or amending the Bylaws of the
Corporation; and, unless a resolution or the Certificate of Incorporation
expressly so provides, no such committee shall have the power or authority to
declare a dividend or to authorize the issuance of any capital stock.
Section 11. Minutes of Committee Meetings. Each committee shall keep regular
minutes of its meetings and report the same to the Board of Directors when
required.
Section 12. Compensation of Directors. Unless otherwise restricted by the
Certificate of Incorporation or these Bylaws, the Board of Directors shall
have the authority to fix the compensation of directors which may be paid in
such forms and amounts as determined by the Board of Directors. Without
limiting the foregoing, the directors may be paid their expenses, if any, of
attendance at each meeting of the Board of Directors and may be paid a fixed
sum for attendance at each meeting of the Board of Directors or a stated
salary as a director. No such payment shall preclude any director from serving
the Corporation in any other capacity and receiving compensation therefor.
Members of special or standing committees may be allowed like compensation for
attending committee meetings.
ARTICLE IV
OFFICERS
Section 1. Officers. The officers of the Corporation shall include a
President, Secretary and Treasurer. The Corporation may have such other
officers as are elected or appointed in accordance with these Bylaws,
including a Chairman of the Board, Chief Executive Officer, Chief Financial
Officer, one or more Vice Presidents and one or more Assistant Secretaries and
Assistant Treasurers. The executive officers of the Corporation shall be
elected and appointed by the Board of Directors. In the event there are two or
more Vice Presidents, then one or more may be designated as Executive Vice
President, Senior Vice President, or other similar or dissimilar title. At the
time of the election of officers, the directors may by resolution determine
the order of their rank. Any number of offices may be held by the same person,
unless the Certificate of Incorporation or these Bylaws
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otherwise provide. Each officer of the Corporation appointed in accordance
with these Bylaws shall have the authority to sign contracts, agreements,
instruments and other documents for and on behalf of the Corporation.
Section 2. Appointment of Officers. The Board of Directors, at its first
meeting after each annual meeting of stockholders, shall choose the executive
officers and such other officers as it deems necessary or advisable.
Section 3. Subordinate Officers. The Board of Directors may appoint such
other officers and agents as it shall deem necessary or advisable who shall
hold their offices for such terms and shall exercise such powers and perform
such duties as shall be determined from time to time by the Board of
Directors. In addition, the Chief Executive Officer or, if there is no such
officer, the President may appoint such officers (other than executive
officers) and agents as he/she shall deem necessary or advisable who shall
hold their offices for such terms and shall exercise such powers and perform
such duties as shall be determined from time to time by the Chief Executive
Officer or there is no such officer, the President.
Section 4. Compensation of Officers. The Board of Directors shall establish
the compensation of all officers; provided, however, that the Chief Executive
Officer or, if there is no such officer, the President may establish the
salary of any officer appointed by him/her in accordance with these Bylaws
subject to the right of the Board of Directors to change such compensation.
Section 5. Term of Office; Removal and Vacancies. The officers of the
Corporation shall hold office until their successors are chosen and qualify in
their stead. Any officer elected or appointed in accordance with these Bylaws
may be removed at any time by the affirmative vote of a majority of the Board
of Directors; provided, however, that the Chief Executive Officer or the
President may remove any officer appointed by him/her in accordance with these
Bylaws. If the office of any officer or officers becomes vacant for any
reason, the vacancy may be filled in accordance with these Bylaws.
Section 6. Chairman of the Board. The Chairman of the Board, if such an
officer be elected, shall, if present, preside at all meetings of the Board of
Directors and exercise and perform such other powers and duties as may be from
time to time assigned to him/her by the Board of Directors or prescribed by
these Bylaws. The Chairman of the Board may be the Chief Executive Officer of
the Corporation and if so designated, shall have the powers and duties
prescribed in Section 7 of this Article IV.
Section 7. Chief Executive Officer. Subject to the control of the Board of
Directors and to such supervisory powers, if any, as may be given by the Board
of Directors to the Chairman of the Board, if there be such an officer, the
Chief Executive Officer, if such an officer be elected, shall have general
supervision, direction and control of the business and officers of the
Corporation. He/she shall preside at all meetings of the stockholders and, in
the absence of the Chairman of the Board, or if there be none, at all meetings
of the Board of Directors. He/she shall be an ex-officio member of all
committees and shall have the general powers and duties of management usually
vested in the office of Chief Executive Officer of corporations, and shall
have such other powers and duties as may be prescribed by the Board of
Directors or these Bylaws.
Section 8. President. Subject to the supervisory powers of the Chief
Executive Officer, if there be such an officer, and the Chairman of the Board,
if there be such an officer, the President shall have the general powers and
duties of management usually vested in the office of President of
corporations, and shall have such other powers and duties as may be prescribed
by the Board of Directors or these Bylaws. The President may be the Chief
Executive Officer of the Corporation and if so designated, shall have the
powers and duties prescribed in Section 7 of this Article IV.
Section 9. Chief Financial Officer. Subject to the supervisory powers of the
Chief Executive Officer, if there be such an officer, and the President, the
Chief Financial Officer shall have general supervision, direction and control
of the Corporation's financial matters and shall have such other powers and
duties as may be prescribed by the Board of Directors or these Bylaws. The
Chief Financial Officer shall render to the Board of
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Directors, at its regular meetings, or when the Board of Directors so
requires, an account of the financial condition of the Corporation.
Section 10. Vice Presidents. In the absence or disability of the President,
the Vice Presidents in order of their rank as fixed by the Board of Directors,
or if not ranked, the Vice President designated by the Board of Directors,
shall perform all the duties of the President, and when so acting shall have
all the powers of and be subject to all the restrictions upon the President.
The Vice Presidents shall have such other duties as from time to time may be
prescribed for them, respectively, by the Board of Directors.
Section 11. Secretary. The Secretary shall attend all sessions of the Board
of Directors and all meetings of the stockholders and record all votes and the
minutes of all proceedings in a book to be kept for that purpose; and shall
perform like duties for the standing committees when required by the Board of
Directors. He/She shall give, or cause to be given, notice of all meetings of
the stockholders and of the Board of Directors, and shall perform such other
duties as may be prescribed by the Board of Directors or these Bylaws. He/She
shall keep in safe custody the seal of the Corporation, and when authorized by
the Board, affix the same to any instrument requiring it, and when so affixed
it shall be attested by his/her signature or by the signature of an Assistant
Secretary. The Board of Directors may give general authority to any other
officer to affix the seal of the Corporation and to attest the affixing by
his/her signature.
Section 12. Assistant Secretary. The Assistant Secretary, or if there be
more than one, the Assistant Secretaries in the order determined by the Board
of Directors, or if there be no such determination, the Assistant Secretary
designated by the Board of Directors, shall, in the absence or disability of
the Secretary, perform the duties and exercise the powers of the Secretary and
shall perform such other duties and have such other powers as the Board of
Directors may from time to time prescribe.
Section 13. Treasurer. The Treasurer shall have the custody of the corporate
funds and securities and shall keep full and accurate accounts of receipts and
disbursements in books belonging to the Corporation and shall deposit all
monies, and other valuable effects in the name and to the credit of the
Corporation, in such depositories as may be designated by the Board of
Directors. He/She shall disburse the funds of the Corporation as may be
ordered by the executive officers of the Corporation, taking proper vouchers
for such disbursements, and shall render to the Board of Directors, when the
Board of Directors so requires, an account of all his/her transactions as
Treasurer. If required by the Board of Directors, he/she shall give the
Corporation a bond, in such sum and with such surety or sureties as shall be
satisfactory to the Board of Directors, for the faithful performance of the
duties of his/her office and for the restoration to the Corporation, in case
of his/her death, resignation or removal from office, of all books, papers,
vouchers, money and other property of whatever kind in his/her possession or
under his/her control belonging to the Corporation.
Section 14. Assistant Treasurer. The Assistant Treasurer, or if there shall
be more than one, the Assistant Treasurers in the order determined by the
Board of Directors, or if there be no such determination, the Assistant
Treasurer designated by the Board of Directors, shall, in the absence or
disability of the Treasurer, perform the duties and exercise the powers of the
Treasurer and shall perform such other duties and have such other powers as
the Board of Directors may from time to time prescribe.
ARTICLE V
INDEMNIFICATION OF DIRECTORS AND OFFICERS
(a) The Corporation shall indemnify to the maximum extent permitted by law
any person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative (other than an action by or in the
right of the Corporation) by reason of the fact that he/she is or was a
director or officer of the Corporation, or is or was serving at the request of
the Corporation as a director or officer of another corporation, partnership,
joint venture, trust or other enterprise, against expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement actually
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and reasonably incurred by him in connection with such action, suit or
proceeding if he/she acted in good faith and in a manner he/she reasonably
believed to be in or not opposed to the best interests of the Corporation,
and, with respect to any criminal action or proceeding, had no reasonable
cause to believe his/her conduct was unlawful. The termination of any action,
suit or proceeding by judgment, order, settlement, conviction, or upon a plea
of nolo contendere or its equivalent, shall not, of itself, create a
presumption that the person did not act in good faith and in a manner which
he/she reasonably believed to be in or not opposed to the best interests of
the Corporation, and, with respect to any criminal action or proceeding, had
reasonable cause to believe that his/her conduct was unlawful.
(b) The Corporation shall indemnify to the maximum extent permitted by law
any person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action or suit by or in the right of the
Corporation to procure a judgment in its favor by reason of the fact that
he/she is or was a director or officer of the Corporation, or is or was
serving at the request of the Corporation as a director or officer of another
corporation, partnership, joint venture, trust or other enterprise against
expenses (including attorneys' fees) actually and reasonably incurred by him
in connection with the defense or settlement of such action or suit if he/she
acted in good faith and in a manner he/she reasonably believed to be in or not
opposed to the best interests of the Corporation and except that no such
indemnification shall be made in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable to the Corporation
unless and only to the extent that the Court of Chancery of Delaware or the
court in which such action or suit was brought shall determine upon
application that, despite the adjudication of liability but in view of all the
circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such expenses which such Court of Chancery or such other court
shall deem proper.
(c) To the extent that a director or officer of the Corporation shall be
successful on the merits or otherwise in defense of any action, suit or
proceeding referred to in paragraphs (a) and (b), or in defense of any claim,
issue or matter therein, he/she shall be indemnified against expenses
(including attorneys' fees) actually and reasonably incurred by him in
connection therewith.
(d) Any indemnification under paragraphs (a) and (b) (unless ordered by a
court) shall be made by the Corporation only as authorized in the specific
case upon a determination that indemnification of the director or officer is
proper in the circumstances because he/she has met the applicable standard of
conduct set forth in paragraphs (a) and (b). Such determination shall be made
(1) by the Board of Directors by a majority vote of a quorum consisting of
directors who were not parties to such action, suit or proceeding, or (2) if
such a quorum is not obtainable, or, even if obtainable, a quorum of
disinterested directors so directs, by independent legal counsel in a written
opinion, or (3) by the stockholders. The Corporation, acting through its Board
of Directors or otherwise, shall cause such determination to be made if so
requested by any person who is indemnifiable under this Article V.
(e) Expenses (including attorneys' fees) incurred by an officer or director
in defending any civil, criminal, administrative or investigative action, suit
or proceeding shall be paid by the Corporation in advance of the final
disposition of such action, suit or proceeding upon receipt of an undertaking
by or on behalf of such director or officer to repay such amount if it shall
ultimately be determined that he/she is not entitled to be indemnified by the
Corporation as authorized in this Article V.
(f) The indemnification and advancement of expenses provided by, or granted
pursuant to, the other paragraphs of this Article V shall not be deemed
exclusive of any other rights to which those seeking indemnification or
advancement of expenses may be entitled under any other provision of these
Bylaws, as now or hereafter in effect, agreement, vote of stockholders or
disinterested directors or otherwise, both as to action in his/her official
capacity and as to action in another capacity while holding such office.
If a claim for indemnification or payment of expenses under this Article V
is not paid in full within ninety (90) days after a written claim therefor has
been received by the Corporation, the claimant may file suit to recover the
unpaid amount of such claim and, if successful in whole or in part, shall be
entitled to be paid the expense of
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prosecuting such claim. In any such action the Corporation shall have the
burden of proving that the claimant was not entitled to the requested
indemnification or payment of expenses under applicable law.
(g) The Board of Directors may authorize, by a vote of a majority of a
quorum of the Board of Directors, the Corporation to purchase and maintain
insurance on behalf of any person who is or was a director or officer of the
Corporation, or is or was serving at the request of the Corporation as a
director or officer of another corporation, partnership, joint venture, trust
or other enterprise against any liability asserted against him and incurred by
him in any such capacity, or arising out of his/her status as such, whether or
not the Corporation would have the power to indemnify him against such
liability under the provisions of this Article V.
(h) The Board of Directors may authorize the Corporation to enter into a
contract with any person who is or was a director or officer of the
Corporation or is or was serving at the request of the Corporation as a
director or officer of another corporation, partnership, joint venture, trust
or other enterprise providing for indemnification rights equivalent to or, if
the Board of Directors so determines, greater than those provided in this
Article V.
(i) For the purposes of this Article V, references to the "Corporation"
shall include, in addition to the resulting corporation, any constituent
corporation (including any constituent of a constituent) absorbed in a
consolidation or merger which, if its separate existence had continued, would
have had power and authority to indemnify its directors or officers so that
any person who is or was a director or officer of such constituent
corporation, or is or was serving at the request of such constituent
corporation as a director or officer of another corporation, partnership,
joint venture, trust or other enterprise, shall stand in the same position
under the provisions of this Article V with respect to the resulting or
surviving corporation as he/she would have with respect to such constituent
corporation if its separate existence had continued.
(j) For purposes of this Article V, references to "other enterprises" shall
include employee benefit plans; references to "fines" shall include any excise
taxes assessed on a person with respect to an employee benefit plan;
references to "serving at the request of the Corporation" shall include
service as a director or officer of the Corporation which imposes duties on,
or involves services by, such director or officer with respect to an employee
benefit plan, its participants or beneficiaries; and a person who acted in
good faith and in a manner he/she reasonably believed to be in the interest of
the participants and beneficiaries of an employee benefit plan shall be deemed
to have acted in a manner "not opposed to the best interests of the
Corporation" as referred to in this Article V.
(k) The indemnification and advancement of expenses provided by, or granted
pursuant to, this Article V shall, unless otherwise provided when authorized
or ratified, continue as to a person who has ceased to be a director or
officer and shall inure to the benefit of the heirs, executors and
administrators of such a person.
(l) The Corporation shall be required to indemnify a person in connection
with a proceeding (or part thereof) initiated by such person only if the
proceeding (or part thereof) was authorized by the Board of Directors of the
Corporation.
ARTICLE VI
INDEMNIFICATION OF EMPLOYEES AND AGENTS
The Corporation may indemnify every person who was or is a party or is or
was threatened to be made a party to any action, suit, or proceeding, whether
civil, criminal, administrative or investigative, by reason of the fact that
he/she is or was an employee or agent of the Corporation or, while an employee
or agent of the Corporation, is or was serving at the request of the
Corporation as an employee or agent or trustee of another corporation,
partnership, joint venture, trust, employee benefit plan or other enterprise,
against expenses (including attorneys' fees), judgments, fines and amounts
paid in settlement actually and reasonably incurred by him in connection with
such action, suit or proceeding, to the extent permitted by applicable law.
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ARTICLE VII
CERTIFICATES OF STOCK
Section 1. Certificates. Every holder of capital stock of the Corporation
shall be entitled to have a certificate signed by, or in the name of the
Corporation by, the Chairman of the Board of Directors, or the President or a
Vice President, and by the Secretary or an Assistant Secretary, or the
Treasurer or an Assistant Treasurer of the Corporation, certifying the number
of shares represented by the certificate owned by such stockholder in the
Corporation.
Section 2. Signatures on Certificates. Any or all of the signatures on the
certificate may be by facsimile. In case any officer, transfer agent, or
registrar who has signed or whose facsimile signature has been placed upon a
certificate shall have ceased to be such officer, transfer agent, or registrar
before such certificate is issued, it may be issued by the Corporation with
the same effect as if he/she were such officer, transfer agent, or registrar
at the date of issue.
Section 3. Statement of Stock Rights; Preferences; Privileges. If the
Corporation shall be authorized to issue more than one class of capital stock
or more than one series of any class, the powers, designations, preferences
and relative, participating, optional or other special rights of each class of
stock or series thereof and the qualification, limitations or restrictions of
such preferences and/or rights shall be set forth in full or summarized on the
face or back of the certificate which the Corporation shall issue to represent
such class or series of stock, provided that, except as otherwise provided in
Section 202 of the General Corporation Law of Delaware, in lieu of the
foregoing requirements, there may be set forth on the face or back of the
certificate which the Corporation shall issue to represent such class or
series of stock, a statement that the Corporation will furnish without charge
to each stockholder who so requests the powers, designations, preferences and
relative, participating, optional or other special rights of each class of
stock or series thereof and the qualifications, limitations or restrictions of
such preferences and/or rights.
Section 4. Lost Certificates. The Board of Directors may direct a new
certificate or certificates to be issued in place of any certificate or
certificates theretofore issued by the Corporation alleged to have been lost,
stolen or destroyed, upon the making of an affidavit of that fact by the
person claiming the certificate of stock to be lost, stolen or destroyed. When
authorizing such issue of a new certificate or certificates, the Board of
Directors may, in its discretion and as a condition precedent to the issuance
thereof, require the owner of such lost, stolen or destroyed certificate or
certificates, or his/her legal representative, to advertise the same in such
manner as it shall require and/or to give the Corporation a bond in such sum
as it may direct as indemnity against any claim that may be made against the
Corporation with respect to the certificate alleged to have been lost, stolen
or destroyed.
Section 5. Transfers of Stock. Upon surrender to the Corporation, or the
transfer agent of the Corporation, of a certificate for shares duly endorsed
or accompanied by proper evidence of succession, assignation or authority to
transfer, it shall be the duty of the Corporation to issue a new certificate
to the person entitled thereto, cancel the old certificate and record the
transaction upon the Corporation's books.
Section 6. Registered Stockholders. The Corporation shall be entitled to
treat the holder of record of any share or shares of stock as the holder in
fact thereof and accordingly shall not be bound to recognize any equitable or
other claim or interest in such share on the part of any other person, whether
or not it shall have express or other notice thereof, save as expressly
provided by the laws of the State of Delaware.
ARTICLE VIII
GENERAL PROVISIONS
Section 1. Dividends. Dividends upon the capital stock of the Corporation,
subject to the provisions of the Certificate of Incorporation, if any, may be
declared by the Board of Directors at any regular or special meeting, pursuant
to law. Dividends may be paid in cash, in property, or in shares of the
capital stock, subject to the provisions of the Certificate of Incorporation.
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<PAGE>
Section 2. Payment of Dividends; Directors' Duties. Before payment of any
dividend there may be set aside out of any funds of the Corporation available
for dividends such sum or sums as the directors from time to time, in their
absolute discretion, think proper as a reserve fund to meet contingencies, or
for equalizing dividends, or for repairing or maintaining any property of the
Corporation, or for such other purpose as the directors shall think conducive
to the interests of the Corporation, and the directors may abolish any such
reserve.
Section 3. Checks. All checks of demands for money and notes of the
Corporation shall be signed by such officer or officers as the Board of
Directors may from time to time designate.
Section 4. Fiscal Year. The fiscal year of the Corporation shall be fixed by
resolution of the Board of Directors.
Section 5. Corporate Seal. The corporate seal shall have inscribed thereon
the name of the Corporation, the year of its organization and the words
"Corporate Seal, Delaware." Said seal may be used by causing it or a facsimile
thereof to be impressed or affixed or reproduced or otherwise.
Section 6. Manner of Notice. Whenever, under the provisions of the statutes
or of the Certificate of Incorporation or of these Bylaws, notice is required
to be given to any director or stockholder, it shall not be construed to mean
personal notice, but such notice may be given in writing, by mail, addressed
to such director or stockholder, at his/her address as it appears on the
records of the Corporation, with postage thereon prepaid, and such notice
shall be deemed to be given at the time when the same shall be deposited in
the United States mail. Notice to directors may also be given by facsimile.
Section 7. Waiver of Notice. Whenever any notice is required to be given
under the provisions of the statutes or of the Certificate of Incorporation or
of these Bylaws, a waiver thereof in writing, signed by the person or persons
entitled to said notice, whether before or after the time stated therein,
shall be deemed equivalent thereto.
Section 8. Annual Statement. The Board of Directors shall present at each
annual meeting, and at any special meeting of the stockholders when called for
by vote of the stockholders, a full and clear statement of the business and
condition of the Corporation.
ARTICLE IX
AMENDMENTS
Section 1. Amendment by Directors or Stockholders. These Bylaws may be
altered, amended or repealed or new Bylaws may be adopted by the stockholders
or by the Board of Directors, when such power is conferred upon the Board of
Directors by the Certificate of Incorporation, at any regular meeting of the
stockholders or of the Board of Directors or at any special meeting of the
stockholders or of the Board of Directors if notice of such alteration,
amendment, repeal or adoption of new Bylaws be contained in the notice of such
special meeting. If the power to adopt, amend or repeal Bylaws is conferred
upon the Board of Directors by the Certificate of Incorporation it shall not
divest or limit the power of the stockholders to adopt, amend or repeal
Bylaws.
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CERTIFICATE OF SECRETARY
I, the undersigned, do hereby certify:
(1) That I am the duly elected and acting Secretary of Blowout Entertainment,
Inc., a Delaware corporation; and
(2) That the foregoing Amended and Restated Bylaws constitute the bylaws of
said Corporation as duly adopted by the written consent of the sole stockholder
of said Corporation as of March 20, 1996.
IN WITNESS WHEREOF, I have hereunto subscribed my name this 20th day of
March, 1996.
/s/ Kim Co_____________________x
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EXHIBITS
<TABLE>
<S> <C>
2.1 Form of Distribution Agreement dated November 11, 1996 between BlowOut
Entertainment, Inc. and Rentrak Corporation and principal exhibits thereto.
3.1 Amended and Restated Certificate of Incorporation (included as Annex II to the
Information Statement)
3.2 Amended and Restated Bylaws (included as Annex III to the Information Statement)
4.1 Specimen Common Stock Certificate
10.1 1996 Equity Participation Plan of BlowOut Entertainment, Inc.
10.2 National Account Agreement between BlowOut Entertainment, Inc., and Rentrak
Corporation dated March 15, 1996 and First Addendum thereto dated March 16, 1996.
10.3.1 Amended and Restated Employment Agreement between BlowOut Entertainment, Inc. and
Steve Berns, dated as of March 1, 1996.
10.3.2 Amended and Restated Employment Agreement between BlowOut Entertainment, Inc. and
Karl D. Wetzel, dated February 1, 1996.
10.3.3 Amended and Restated Employment Agreement between BlowOut Entertainment, Inc. and
Harold Heyer, dated April 22, 1996.
10.3.4 Summary of Amendments dated November 4, 1996 to Amended and Restated Employment
Agreements of Steve Berns, Karl D. Wetzel and Harold Heyer.
10.4 Agreement dated July 22, 1996 between Star Video Entertainment L.P. and BlowOut
Entertainment, Inc.
10.5 Guarantee Agreement dated June 26, 1996 between Rentrak Corporation and BlowOut
Entertainment, Inc.
10.6 Senior Loan and Surety Agreement dated July 23, 1996 between BlowOut Entertainment,
Inc. and Phoenix Leasing Incorporated.
10.7 Loan and Security Agreement dated September 12, 1996 between BlowOut Entertainment,
Inc. and Coast Business Credit.
10.8 Combination Commercial Sublease dated January 1, 1996 among Rentrak Corporation,
BlowOut Entertainment, Inc., Skyport Industrial Park Partnership and Airport
Partners, L.L.C.
10.9 Registration Rights Agreement dated as of May 28, 1996 by and among BlowOut
Entertainment, Inc., Rentrak Corporation Streamlined Solutions, Inc., Mortco Inc.
and the other persons named therein.
10.10 Intercompany Note dated as of December 31, 1995 executed by BlowOut Entertainment,
Inc. as Maker and Rentrak Corporation as Payee.
10.11 Form of Indemnity Agreement.
10.12 Master Sublease Agreement dated September 21, 1994 between KMart Corporation and
SuperCenter Entertainment Corporation and First Amendment thereto dated April 1,
1995 and Second Amendment thereto dated January 21, 1996.
10.13 Agreement dated May 1, 1995 between Ralphs Grocery Company and SVI, Inc. and First
Amendment thereto dated May 1, 1995.
10.14 Master Shopping Center Lease Agreement dated as of November 19, 1994 between Wal-
Mart Stores, Inc. and SuperCenter Entertainment, Inc. and First Amendment thereto
dated May 15, 1995 and Second Amendment thereto dated May 14, 1996.
10.15 License Agreement dated March 15, 1996 between Rentrak Corporation and BlowOut
Entertainment, Inc. and First Amendment thereto dated June 25, 1996.
10.16 Form of Subscription Agreement dated as of August 28, 1996 between Culture
Convenience Club Ltd. and BlowOut Entertainment, Inc.
10.17 Form of Note Conversion Agreement dated as of August 28, 1996 between Bill Levine
and BlowOut Entertainment, Inc.
10.18 Form of Note Conversion Agreement dated as of August 28, 1996 between Culture
Convenience Club Ltd. and BlowOut Entertainment, Inc.
10.19 Form of Registration Rights Agreement dated as of August 28, 1996 between Culture
Convenience Club Ltd., Bill Levine and BlowOut Entertainment, Inc.
21.1 List of Subsidiaries
27.1 Financial Data Schedule
</TABLE>
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<PAGE>
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act of
1934, the Registrant has duly caused this registration statement to be signed
on its behalf by the undersigned, thereunto duly authorized.
BLOWOUT ENTERTAINMENT, INC.
By: /s/ Steve Bern_____________s
Steve Berns
President
Date: November 11, 1996
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<PAGE>
EXHIBIT INDEX
<TABLE>
<S> <C>
2.1 Form of Distribution and Reorganization Agreement dated November 11, 1996 between
BlowOut Entertainment, Inc. and Rentrak Corporation and principal exhibits thereto.
3.1 Amended and Restated Certificate of Incorporation (included as Annex II to the
Information Statement)
3.2 Amended and Restated Bylaws (included as Annex III to the Information Statement)
4.1 Specimen Common Stock Certificate
10.1 1996 Equity Participation Plan of BlowOut Entertainment, Inc.
10.2 National Account Agreement between BlowOut Entertainment, Inc., and Rentrak
Corporation dated March 15, 1996 and First Addendum thereto dated March 16, 1996.
10.3.1 Amended and Restated Employment Agreement between BlowOut Entertainment, Inc. and
Steve Berns, dated as of March 1, 1996.
10.3.2 Amended and Restated Employment Agreement between BlowOut Entertainment, Inc. and
Karl D. Wetzel, dated February 1, 1996.
10.3.3 Amended and Restated Employment Agreement between BlowOut Entertainment, Inc. and
Harold Heyer, dated April 22, 1996.
10.3.4 Summary of Amendments dated November 4, 1996 to Amended and Restated Employment
Agreements of Steve Berns, Karl D. Wetzel and Harold Heyer.
10.4 Agreement dated July 22, 1996 between Star Video Entertainment L.P. and BlowOut
Entertainment, Inc.
10.5 Guarantee Agreement dated June 26, 1996 between Rentrak Corporation and BlowOut
Entertainment, Inc.
10.6 Senior Loan and Surety Agreement dated July 23, 1996 between BlowOut Entertainment,
Inc. and Phoenix Leasing Incorporated.
10.7 Loan and Security Agreement dated September 12, 1996 between BlowOut Entertainment,
Inc. and Coast Business Credit.
10.8 Combination Commercial Sublease dated January 1, 1996 among Rentrak Corporation,
BlowOut Entertainment, Inc., Skyport Industrial Park Partnership and Airport
Partners, L.L.C.
10.9 Registration Rights Agreement dated as of May 28, 1996 by and among BlowOut
Entertainment, Inc., Rentrak Corporation Streamlined Solutions, Inc., Mortco Inc.
and the other persons named therein.
10.10 Intercompany Note dated as of December 31, 1995 executed by BlowOut Entertainment,
Inc. as Maker and Rentrak Corporation as Payee.
10.11 Form of Indemnity Agreement.
10.12 Master Sublease Agreement dated September 21, 1994 between KMart Corporation and
SuperCenter Entertainment Corporation and First Amendment thereto dated April 1,
1995 and Second Amendment thereto dated January 21, 1996.
10.13 Agreement dated May 1, 1995 between Ralphs Grocery Company and SVI, Inc. and First
Amendment thereto dated May 1, 1995.
10.14 Master Shopping Center Lease Agreement dated as of November 19, 1994 between Wal-
Mart Stores, Inc. and SuperCenter Entertainment, Inc. and First Amendment thereto
dated May 15, 1995 and Second Amendment thereto dated May 14, 1996.
10.15 License Agreement dated March 15, 1996 between Rentrak Corporation and BlowOut
Entertainment, Inc. and First Amendment thereto dated June 25, 1996.
10.16 Form of Subscription Agreement dated as of August 28, 1996 between Culture
Convenience Club Ltd. and BlowOut Entertainment, Inc.
10.17 Form of Note Conversion Agreement dated as of August 28, 1996 between Bill Levine
and BlowOut Entertainment, Inc.
10.18 Form of Note Conversion Agreement dated as of August 28, 1996 between Culture
Convenience Club Ltd. and BlowOut Entertainment, Inc.
10.19 Form of Registration Rights Agreement dated as of August 28, 1996 between Culture
Convenience Club Ltd., Bill Levine and BlowOut Entertainment, Inc.
21.1 List of Subsidiaries
27.1 Financial Data Schedule
</TABLE>
